Commonwealth Edison v. Illinois Commerce Commission

Nos. 2-08-0959, 2-08-1037, 2-08-1137,
1-08-3008, 1-08-3030, 1-08-3054, 1-08-3313 cons. Filed: 9-30-10
_________________________________________________________________________________

IN THE

APPELLATE COURT OF ILLINOIS

SECOND DISTRICT
_________________________________________________________________________________

COMMONWEALTH EDISON COMPANY, ) On Petition for Administrative Review
) from the Illinois Commerce Commission.
Petitioner, )
)
v. ) No. 07--0566
)
ILLINOIS COMMERCE COMMISSION; )
THE PEOPLE OF THE STATE OF ILLINOIS )
ex rel. LISA MADIGAN, THE ATTORNEY )
GENERAL; AARP; AARP ILLINOIS; )
BLUESTAR ENERGY SERVICES, INC.; )
BUILDING OWNERS AND MANAGERS )
ASSOCIATION OF CHICAGO; CHICAGO )
TRANSIT AUTHORITY; CITIZENS )
UTILITY BOARD; CHRYSLER, LLC; )
THE CITY OF CHICAGO; THE )
COMMERCIAL GROUP (styled as such )
collectively from the following petitioners: Best )
Buy Company, Inc.; J.C. Penney Corporation, )
Inc.; Macy's, Inc.; Walmart Stores, Inc.); )
CONSTELLATION ENERGY )
COMMODITIES GROUP, INC.; )
CONSTELLATION NEWENERGY, INC.; )
UNITED STATES DEPARTMENT OF )
ENERGY; INTERNATIONAL )
BROTHERHOOD OF ELECTRICAL )
WORKERS LOCAL UNION NO. 15, )
AFL-CIO; ILLINOIS INDUSTRIAL )
ENERGY CONSUMERS, a/k/a IIEC )
(styled as such collectively from the following )
petitioners: Abbott Laboratories, Inc.; )
Arcelormittal USA; Caterpillar, Inc.: Citgo, )
Inc.; Corn Products International, Inc.; )
Daimler Chrysler Corporation; Enbridge )
Nos. 2--08--0959, 2--08--1037, 2--08--1137, 1--08--3008,
1--08--3030, 1--08--3054, 1--08--3313 cons.

Energy, LP; Exxonmobil; Ford Motor Company;)
Merchandise Mart; Sterling Steel Company, )
LLC; Thermal Chicago Cooling, Inc.; Citco Inc.;)
General Iron Industries, Inc.); NORTHEAST )
ILLINOIS REGIONAL COMMUTER )
RAILROAD CORPORATION, d/b/a Metra; )
NUCOR STEEL KANKAKEE, INC.; THE )
KROGER COMPANY; THE COALITION )
TO REQUEST EQUITABLE ALLOCATION )
OF COSTS TOGETHER, a/k/a "REACT" )
(styled as such collectively from the following )
petitioners: A. Finkl and Sons Company; Alsip )
Paper Condominium Association; Aux Sable )
Liquid Products, LP; The City of Chicago; )
Commerce Energy, Inc.; Flint Hills Resources, )
LLC; Integrys Energy Services, Inc.; )
Metropolitan Water Reclamation District of )
Greater Chicago; PDV Midwest Refining, LLC; )
United Airlines, Inc.; Wells Manufacturing, Inc.);)
RETAIL ENERGY SUPPLY ASSOCIATION, )
a/k/a "RESA" (styled as such collectively from )
the following petitioners: Commerce Energy, )
Inc.; Consolidated Edison Solutions, Inc.; )
Direct Energy Services, LLC; Gexa Energy; )
Hess Corporation; Intergrys Energy Services, )
Inc.; Liberty Power Corporation; Reliant Energy)
Retail Services, LLC; Sempra Energy Solutions; )
Strategic Energy, LLC; Suez Energy Resources )
NA, Inc.; US Energy Savings Corporation); )
and UNIVERSITY OF ILLINOIS, )
)
Respondents. )
______________________________________________________________________________

THE PEOPLE OF THE STATE OF ) On Petition for Administrative Review
ILLINOIS ex rel. LISA MADIGAN, THE ) from the Illinois Commerce Commission.
ATTORNEY GENERAL, )
)
Petitioner, )
)
v. ) No. 07--0566
)
ILLINOIS COMMERCE COMMISSION; )
COMMONWEALTH EDISON COMPANY; )

-2-
Nos. 2--08--0959, 2--08--1037, 2--08--1137, 1--08--3008,
1--08--3030, 1--08--3054, 1--08--3313 cons.

AARP; AARP ILLINOIS; BLUESTAR )
ENERGY SERVICES, INC.; BUILDING )
OWNERS AND MANAGERS ASSOCIATION)
OF CHICAGO; CHICAGO TRANSIT )
AUTHORITY; CITIZENS UTILITY BOARD; )
CHRYSLER, LLC; THE CITY OF CHICAGO;)
THE COMMERCIAL GROUP (styled as such )
collectively from the following petitioners: Best )
Buy Company, Inc.; J.C. Penney Corporation, )
Inc.; Macy's, Inc.; Walmart Stores, Inc.); )
CONSTELLATION ENERGY )
COMMODITIES GROUP, INC.; )
CONSTELLATION NEWENERGY, INC.; )
UNITED STATES DEPARTMENT OF )
ENERGY; INTERNATIONAL )
BROTHERHOOD OF ELECTRICAL )
WORKERS LOCAL UNION NO. 15, )
AFL-CIO; ILLINOIS INDUSTRIAL )
ENERGY CONSUMERS, a/k/a IIEC )
(styled as such collectively from the following )
petitioners: Abbott Laboratories, Inc.; )
Arcelormittal USA; Caterpillar, Inc.; Citgo, )
Inc.; Corn Products International, Inc.; Daimler )
Chrysler Corporation; Enbridge Energy, LP; )
Exxonmobil; Ford Motor Company; )
Merchandise Mart; Sterling Steel Company, )
LLC; Thermal Chicago Cooling, Inc.; Citco, Inc;)
General Iron Industries, Inc.); NORTHEAST )
ILLINOIS REGIONAL COMMUTER )
RAILROAD CORPORATION, d/b/a Metra; )
NUCOR STEEL KANKAKEE, INC.; THE )
KROGER COMPANY; THE COALITION )
TO REQUEST EQUITABLE ALLOCATION )
OF COSTS TOGETHER, a/k/a "REACT" )
(styled as such collectively from the following )
petitioners: A. Finkl and Sons Company; )
Alsip Paper Condominium Association; )
Aux Sable Liquid Products, LP; )
The City of Chicago; Commerce Energy, Inc.; )
Flint Hills Resources, LLC; Integrys )
Energy Services, Inc.; Metropolitan Water )
Reclamation District of Greater Chicago; PDV )
Midwest Refining, LLC; United Airlines, )
Inc.; Wells Manufacturing, Inc.); )

-3-
Nos. 2--08--0959, 2--08--1037, 2--08--1137, 1--08--3008,
1--08--3030, 1--08--3054, 1--08--3313 cons.

RETAIL ENERGY SUPPLY ASSOCIATION, )
a/k/a "RESA" (styled as such collectively from )
the following petitioners: Commerce Energy, )
Inc.; Consolidated Edison Solutions, Inc.; )
Direct Energy Services, LLC; Gexa Energy; )
Hess Corporation; Intergrys Energy Services, )
Inc.; Liberty Power Corporation; Reliant Energy)
Retail Services, LLC; Sempra Energy Solutions; )
Strategic Energy, LLC; Suez Energy Resources )
NA, Inc.; US Energy Savings Corporation); )
and UNIVERSITY OF )
ILLINOIS, )
)
Respondents. )
______________________________________________________________________________

CITIZENS UTILITY BOARD, ) On Petition for Administrative Review
) from the Illinois Commerce Commission.
Petitioner, )
)
v. ) No. 07--0566
)
ILLINOIS COMMERCE COMMISSION; )
COMMONWEALTH EDISON COMPANY; )
THE PEOPLE OF THE STATE OF ILLINOIS )
ex rel. LISA MADIGAN, THE )
ATTORNEY GENERAL; AARP; )
AARP ILLINOIS; BLUESTAR ENERGY )
SERVICES, INC.; BUILDING OWNERS )
AND MANAGERS ASSOCIATION OF )
CHICAGO; CHICAGO TRANSIT )
AUTHORITY; CHRYSLER LLC; THE CITY )
OF CHICAGO; THE COMMERCIAL )
GROUP (styled as such collectively from the )
following petitioners: Best Buy Company, Inc.; )
J.C. Penney Corporation, Inc.; Macy's, Inc.; )
Walmart Stores, Inc.); )
CONSTELLATION ENERGY )
COMMODITIES GROUP, INC.; )
CONSTELLATION NEWENERGY, INC.; )
UNITED STATES DEPARTMENT OF )
ENERGY; INTERNATIONAL )
BROTHERHOOD OF ELECTRICAL )
WORKERS LOCAL UNION NO. 15, )

-4-
Nos. 2--08--0959, 2--08--1037, 2--08--1137, 1--08--3008,
1--08--3030, 1--08--3054, 1--08--3313 cons.

AFL-CIO; ILLINOIS INDUSTRIAL )
ENERGY CONSUMERS, a/k/a IIEC )
(styled as such collectively from the following )
petitioners: Abbott Laboratories, Inc.; )
Arcelormittal USA; Caterpillar, Inc.; Citgo, )
Inc.; Corn Products International, Inc.; )
Daimler Chrysler Corporation; Enbridge )
Energy, LP; Exxonmobil; Ford Motor )
Company; Merchandise Mart; Sterling Steel )
Company, LLC; Thermal Chicago Cooling, )
Inc.; Citco Inc.; General Iron Industries, Inc.); )
NORTHEAST ILLINOIS REGIONAL )
COMMUTER RAILROAD CORPORATION, )
d/b/a Metra; NUCOR STEEL KANKAKEE, )
INC.; THE KROGER COMPANY; THE )
COALITION TO REQUEST EQUITABLE )
ALLOCATION OF COSTS TOGETHER, )
a/k/a "REACT" (styled as such collectively )
from the following petitioners: A. Finkl )
and Sons Company; Alsip Paper Condominium )
Association; Aux Sable Liquid Products. LP; )
The City of Chicago; Commerce Energy, Inc.; )
Flint Hills Resources, LLC; Integrys Energy )
Services, Inc.; Metropolitan Water )
Reclamation District of Greater Chicago; PDV )
Midwest Refining, LLC; United Airlines, Inc.; )
Wells Manufacturing, Inc.); RETAIL )
ENERGY SUPPLY ASSOCIATION, )
a/k/a "RESA" (styled as such collectively from )
the following petitioners: Commerce Energy, )
Inc.; Consolidated Edison Solutions, Inc.; )
Direct Energy Services, LLC; Gexa Energy; )
Hess Corporation; Intergrys Energy Services, )
Inc.; Liberty Power Corporation; Reliant Energy)
Retail Services, LLC; Sempra Energy Solutions; )
Strategic Energy, LLC; Suez Energy Resources )
NA, Inc.; US Energy Savings Corporation); )
and UNIVERSITY OF ILLINOIS, )
)
Respondents. )
______________________________________________________________________________

THE BUILDING OWNERS AND ) On Petition for Administrative Review
MANAGERS ASSOCIATION OF CHICAGO, ) from the Illinois Commerce Commission.

-5-
Nos. 2--08--0959, 2--08--1037, 2--08--1137, 1--08--3008,
1--08--3030, 1--08--3054, 1--08--3313 cons.

)
Petitioner, )
)
v. ) No. 07--0566
ILLINOIS COMMERCE COMMISSION; )
COMMONWEALTH EDISON COMPANY; )
THE PEOPLE OF THE STATE OF ILLINOIS )
ex rel. LISA MADIGAN, THE ATTORNEY )
GENERAL; AARP; AARP ILLINOIS; )
BLUESTAR ENERGY SERVICES, INC.; )
CHICAGO TRANSIT AUTHORITY; )
CITIZENS UTILITY BOARD; CHRYSLER, )
THE CITY OF CHICAGO; THE )
COMMERCIAL GROUP (styled as such )
collectively from the following petitioners: Best )
Buy Company, Inc.; J.C. Penney Corporation, )
Inc.; Macy's, Inc.; Walmart Stores, Inc.); )
CONSTELLATION ENERGY )
COMMODITIES GROUP, INC.; )
CONSTELLATION NEWENERGY, INC.; )
UNITED STATES DEPARTMENT OF )
ENERGY; INTERNATIONAL )
BROTHERHOOD OF ELECTRICAL )
WORKERS LOCAL UNION NO. 15, )
AFL-CIO; ILLINOIS INDUSTRIAL )
ENERGY CONSUMERS, a/k/a IIEC )
(styled as such collectively from the following )
petitioners: Abbott Laboratories, Inc.; )
Arcelormittal USA; Caterpillar, Inc.; Citgo, )
Inc.; Corn Products International, Inc.; )
Daimler Chrysler Corporation; Enbridge )
Energy, LP; Exxonmobil; Ford Motor )
Company; Merchandise Mart; Sterling Steel )
Company, LLC; Thermal Chicago Cooling, )
Inc.; Citco Inc.; General Iron Industries, Inc.); )
NORTHEAST ILLINOIS REGIONAL )
COMMUTER RAILROAD CORPORATION, )
d/b/a Metra; NUCOR STEEL KANKAKEE, )
INC.; THE KROGER COMPANY; )
THE COALITION TO REQUEST )
EQUITABLE ALLOCATION OF COSTS )
TOGETHER, a/ka/ "REACT" (styled as such )
collectively from the following petitioners; )
A. Finkl and Sons Company; Alsip Paper )

-6-
Nos. 2--08--0959, 2--08--1037, 2--08--1137, 1--08--3008,
1--08--3030, 1--08--3054, 1--08--3313 cons.

Condominium Association; Aux Sable Liquid )
Products, LP; The City of Chicago; Commerce )
Energy, Inc.; Flint Hills Resources, LLC; )
Integrys Energy Services, Inc.; Metropolitan )
Water Reclamation District of Greater Chicago; )
PDV Midwest Refining, LLC; United Airlines, )
Inc.; Wells Manufacturing, Inc.); )
RETAIL ENERGY SUPPLY ASSOCIATION, )
a/k/a "RESA" (styled as such collectively from )
the following petitioners: Commerce Energy, )
Inc.; Consolidated Edison Solutions, Inc.; )
Direct Energy Services, LLC; Gexa Energy; )
Hess Corporation; Intergrys Energy Services, )
Inc.; Liberty Power Corporation; Reliant Energy)
Retail Services, LLC; Sempra Energy Solutions; )
Strategic Energy, LLC; Suez Energy Resources )
NA, Inc.; US Energy Savings Corporation); )
and UNIVERSITY OF ILLINOIS, )
)
Respondents. )
______________________________________________________________________________

ABBOTT LABORATORIES, INC.; ) On Petition for Administrative Review
ARCELORMITTAL USA; CATERPILLAR ) from the Illinois Commerce Commission.
INC.; CORN PRODUCTS )
INTERNATIONAL, INC.; DAIMLER )
CHRYSLER CORPORATION; ENBRIDGE )
ENERGY, LP; EXXONMOBIL; FORD )
COMPANY; MERCHANDISE MART; )
STERLING STEEL COMPANY, LLC; )
THERMAL CHICAGO COOLING, INC.; )
CITCO, INC.; GENERAL IRON )
INDUSTRIES, INC., )
)
Petitioners, )
)
v. ) No. 07--0566
)
ILLINOIS COMMERCE COMMISSION; )
COMMONWEALTH EDISON COMPANY; )
THE PEOPLE OF THE STATE OF ILLINOIS )
ex rel. LISA MADIGAN, THE ATTORNEY )
GENERAL; AARP; AARP ILLINOIS; )
BLUESTAR ENERGY SERVICES, INC.; )

-7-
Nos. 2--08--0959, 2--08--1037, 2--08--1137, 1--08--3008,
1--08--3030, 1--08--3054, 1--08--3313 cons.

BUILDING OWNERS AND MANAGERS )
ASSOCIATION OF CHICAGO; CHICAGO )
TRANSIT AUTHORITY; CITIZENS )
UTILITY BOARD; CHRYSLER, LLC; THE )
CITY OF CHICAGO; THE COMMERCIAL )
COMMERCIAL GROUP (styled as such )
collectively from the following petitioners: Best )
Buy Company, Inc.; J.C. Penney Corporation, )
Inc.; Macy's, Inc.; Walmart Stores, Inc.); )
CONSTELLATION ENERGY )
COMMODITIES GROUP, INC.; )
CONSTELLATION NEWENERGY, INC.; )
UNITED STATES DEPARTMENT OF )
ENERGY; INTERNATIONAL )
BROTHERHOOD OF ELECTRICAL )
WORKERS LOCAL UNION NO. 15, )
AFL-CIO; NORTHEAST ILLINOIS )
REGIONAL COMMUTER RAILROAD )
CORPORATION, d/b/a Metra; NUCOR )
STEEL KANKAKEE, INC.; THE KROGER )
COMPANY; THE COALITION TO )
REQUEST EQUITABLE ALLOCATION )
OF COSTS TOGETHER, a/k/a "REACT" )
styled as such collectively from the following )
petitioners; A. Finkl and Sons Company; )
Alsip Paper Condominium Association; )
Aux Sable Liquid Products, LP; The City )
of Chicago; Commerce Energy, Inc.; )
Flint Hills Resources, LLC; Integrys Energy )
Services, Inc.; Metropolitan Water )
Reclamation District of Greater Chicago; )
PDV Midwest Refining, LLC; United Airlines, )
Inc.; Wells Manufacturing, Inc.); )
RETAIL ENERGY SUPPLY ASSOCIATION, )
a/k/a "RESA" (styled as such collectively from )
the following petitioners: Commerce Energy, )
Inc.; Consolidated Edison Solutions, Inc.; )
Direct Energy Services, LLC; Gexa Energy; )
Hess Corporation; Intergrys Energy Services, )
Inc.; Liberty Power Corporation; Reliant Energy)
Retail Services, LLC; Sempra Energy Solutions; )
Strategic Energy, LLC; Suez Energy Resources )
NA, Inc.; US Energy Savings Corporation); )
and UNIVERSITY OF ILLINOIS, )

-8-
Nos. 2--08--0959, 2--08--1037, 2--08--1137, 1--08--3008,
1--08--3030, 1--08--3054, 1--08--3313 cons.

)
Respondents. )
______________________________________________________________________________

JUSTICE BURKE delivered the opinion of the court:

Commonwealth Edison Company (ComEd) is a public utility company that distributes

electricity to consumers in northern Illinois. ComEd petitioned the Illinois Commerce Commission

(Commission) to restructure and alter the rates ComEd charges, seeking a $360 million increase.

ComEd calculated its revenue requirement using 2006 as an historical "test year" and included certain

new distribution assets, referred to as "plant." These consolidated appeals arise from the

Commission's order granting an increase of about $274 million.

ComEd appeals the order, arguing that the Commission did not grant ComEd full recovery

of prudent and reasonable costs of certain employees' salaries and wages. ComEd further asserts that,

if we rule against it on issues raised by the other parties, it would be denied the benefit of a bargain

that it struck with the Commission's staff (Staff). During the proceedings, ComEd and the Staff

recommended that the Commission resolve certain issues in ComEd's favor and, in exchange, ComEd

would waive inclusion of certain capital additions in its rate base. ComEd argues that it would be

manifestly unfair to modify the agreement without allowing ComEd to add those capital additions to

its rate base.

The Illinois Industrial Energy Consumers (IIEC), which includes Abbott Laboratories, Inc.,

and other large electricity consumers, intervened in the proceedings, to challenge the proposed rate

increase. On appeal, IIEC argues that the Commission erred in allowing for post-test-year plant

additions in the rate base without also recognizing a setoff for post-test-year changes in accumulated

depreciation in the existing plant. IIEC argues that the order unlawfully inflates ComEd's rate base,

-9-
Nos. 2--08--0959, 2--08--1037, 2--08--1137, 1--08--3008,
1--08--3030, 1--08--3054, 1--08--3313 cons.

violates test-year requirements as set forth in case law and the Commission's own rules, and

misapprehends the Commission's duty to decide a case exclusively on the record before it, regardless

of how the Commission decided the same issue in the past.

The Attorney General (AG) and the Citizens Utility Board (CUB) intervened separately to

protect the rights of consumers to "just and reasonable" rates as prescribed by the Public Utilities Act

(Act) (220 ILCS 5/1--101 et seq. (West 2006)). AG and CUB also filed notices of appeal, appearing

collectively as the "Government and Residential Consumer Petitioners" (GC Petitioners). GC

Petitioners echo IIEC's argument that the Commission erred in not accounting for the post-test-year

changes in accumulated depreciation of the existing plant. GC Petitioners also challenge the

Commission's approval of "Rider SMP," which ComEd proposed to immediately recoup the costs

of modernizing its delivery system toward a "smart grid," including a new technology called advanced

metering infrastructure (AMI) that would allow meter reader and supervisor positions to be phased

out.

The Building Owners and Managers Association of Chicago (BOMA) also intervened. On

appeal, BOMA alleges that the Commission's order subjects nonresidential space-heating customers

to unreasonable rate increases and discriminatory treatment in violation of the Act. BOMA asks this

court to order the Commission to provide rate relief to the nonresidential space-heating customers.

We hold that (1) the Commission heard substantial evidence to support excluding from

ComEd's recoverable operating expenses 25% of certain labor costs for employees who performed

both utility work and merger-related work; (2) the Commission erred in not accounting for the

increased accumulated depreciation of the existing plant during the post-test-year period; (3) the

Commission erred in implementing Rider SMP, because the rider violates the rule against single-issue

-10-
Nos. 2--08--0959, 2--08--1037, 2--08--1137, 1--08--3008,
1--08--3030, 1--08--3054, 1--08--3313 cons.

ratemaking; and (4) the Commission did not err in rejecting BOMA's proposal to apply different

delivery rates to nonresidential space-heating customers.

JURISDICTION

The Commission entered its final order on September 10, 2008. On October 15, 2008, the

Commission denied BOMA's application for rehearing but granted rehearing on two issues raised by

ComEd. Two days later, ComEd filed a petition for review in the Appellate Court, Second District

(appeal No. 2--08--0959).

On November 3, 2008, the Commission issued a decision denying all the remaining

applications for review as well as an amendatory order disposing of ComEd's two issues for

rehearing. On that date, AG filed a petition for review in the Appellate Court, First District (appeal

No. 1--08--3008). ComEd filed a second petition for review in the Second District (appeal No. 2--

08--1037). On November 5, 2008, CUB filed a petition for review in the First District (appeal No.

1--08--3030). On November 10, 2008, BOMA filed a petition for review in the First District (appeal

No. 1--08--3054). On December 3, 2008, ComEd filed a third petition for review in the Second

District (appeal No. 2--08--1137). On December 4, 2008, IIEC filed its petition for review in the

First District (appeal No. 1--08--3313).

On January 6, 2009, the supreme court issued a supervisory order directing the First District

to transfer its appeals in this matter to the Second District for consolidation with ComEd's appeals.

This court has jurisdiction to consider the appeals pursuant to Supreme Court Rule 335 and section

10--201(a) of the Act. See 155 Ill. 2d R. 335 (direct review of administrative orders in the appellate

court); 220 ILCS 5/10--201(a) (West 2008) (appeal allowed within 35 days of rehearing to the

-11-
Nos. 2--08--0959, 2--08--1037, 2--08--1137, 1--08--3008,
1--08--3030, 1--08--3054, 1--08--3313 cons.

appellate court of any district where the subject matter is situated, and the district first acquiring

jurisdiction has and retains jurisdiction over all other appeals).

BACKGROUND

ComEd delivers electricity to more than 3.7 million retail consumers in northern Illinois.

Illinois's electric industry underwent certain changes in the late 1990s. In 1997, the General Assembly

amended the Act by enacting the Electric Service Customer Choice and Rate Relief Law of 1997

(Rate Relief Law) (220 ILCS 5/16--101 et seq. (West 2006)), which required electric utilities to open

their formerly legislatively approved monopoly. See 220 ILCS 5/16--103 (West 2006). Utilities were

required to offer delivery services in addition to existing services, at least until an existing service was

either abandoned or declared competitive. 220 ILCS 5/16--103 (West 2006). Delivery services are

"those services provided by the electric utility that are necessary in order for the transmission and

distribution systems to function so that retail customers located in the electric utility's service area can

receive electric power and energy from suppliers other than the electric utility." 220 ILCS 5/16--102

(West 2006).

The Rate Relief Law caused change at both the retail and wholesale levels. For instance,

utilities were required to offer delivery services in a nondiscriminatory manner to all customers. In

response to the new law, ComEd divested itself of its electricity generating assets. See 220 ILCS

5/16--111(g) (West 2006). ComEd became an "integrated distribution company," also known as a

"wires company." ComEd's costs now are driven by the requirement that it meet the needs of a

maximum number of customers, "regardless of the nature of the usage of customers." Generation

of electricity is no longer a consideration. ComEd's costs as a "wires company" do not vary

-12-
Nos. 2--08--0959, 2--08--1037, 2--08--1137, 1--08--3008,
1--08--3030, 1--08--3054, 1--08--3313 cons.

appreciably over time, as they did when costs were driven by generating electricity. Commonwealth

Edison Co. v. Illinois Commerce Comm'n, 398 Ill. App. 3d 510, 513 (2009) (ComEd).

The rates for delivering electricity are calculated separately from the rates for the electric

supply itself. 220 ILCS 5/16--109A, 16--111.5 (West 2008). An electric utility like ComEd is

entitled to rates that allow it to recover fully its prudent and reasonable costs of service. 220 ILCS

5/16--108(c) (West 2006) (rates "shall allow the electric utility to recover the costs of providing

delivery services through its charges").

A rate case is initiated when a utility files tariffs providing for a rate increase and the

Commission suspends those tariffs to conduct an investigation and hearing. 220 ILCS 5/9--201

(West 2006). The Commission may approve, reject, or modify the proposed tariffs. Section 9--

201(c) of the Act provides that, if the Commission initiates a proceeding concerning the

appropriateness of a utility's proposed rates, the utility has the burden of proving that the proposed

rates are just and reasonable. 220 ILCS 5/9--201(c) (West 2006).

In establishing the rates that a public utility is to charge its customers, the Commission

considers the company's operating costs, rate base, and allowed rate of return. Citizens Utilities Co.

v. Illinois Commerce Comm'n, 124 Ill. 2d 195, 200 (1988). Recovery of the utility's operating costs

and the return on its rate base is known as the utility's annual revenue requirement. Generally

speaking, a utility determines its revenue requirement by adding operating costs to invested capital

multiplied by the rate of return. Business & Professional People for the Public Interest v. Illinois

Commerce Comm'n, 146 Ill. 2d 175, 195 (1991) (BPI II). "The components of the revenue

requirement have frequently been expressed in the formula 'R (revenue requirement) = C (operating

-13-
Nos. 2--08--0959, 2--08--1037, 2--08--1137, 1--08--3008,
1--08--3030, 1--08--3054, 1--08--3313 cons.

costs) + Ir (invested capital or rate base times rate of return on capital).' " BPI II, 146 Ill. 2d at 195-

96, quoting Citizens Utilities Co. v. Illinois Commerce Comm'n, 124 Ill. 2d at 200-01. 1

The utility's return, or profit, is the product of the utility's allowed rate of return and its rate

base. Both factors are determined by the Commission. Section 9--211 of the Act provides that a

utility's rate base may include "only the value of such investment which is both prudently incurred and

used and useful in providing service to public utility customers." 220 ILCS 5/9--211 (West 2006).

The value of a utility's rate base investment is affected by both new investment and the decline

in investment value due to plant depreciation. Companies purchase assets such as computers, copy

machines, buildings, and furniture, all of which lose value each day. To give the most accurate

portrayal of the economic reality of the business, this depreciation loss must be accounted for in the

company's financial statements. Recording depreciation loss affects two accounts: depreciation

expense and accumulated depreciation. Accumulated depreciation is the amount of a long-term

asset's cost that has been allocated to depreciation expense since the date that the asset was acquired.

The purpose of the accumulated depreciation account is to reduce an asset's carrying value to reflect

its value loss due to wear, tear, and usage.

Accumulated depreciation reports the amount of an asset's depreciation from the time it was

acquired until the date of the balance sheet. The cost of an asset minus its accumulated depreciation

is the asset's book value. The accumulated depreciation account balance does not close at the end

of each year; therefore, it will increase each year. However, its balance cannot become greater than

the cost of the assets.

1
Revenue Requirement = (Operating Costs) + (Rate Base)(Rate of Return).

-14-
Nos. 2--08--0959, 2--08--1037, 2--08--1137, 1--08--3008,
1--08--3030, 1--08--3054, 1--08--3313 cons.

Accounting is a double entry system of recording debits and credits so that the debits and

credits match. To record a depreciation expense (the debit), one must also record the accumulated

depreciation (the credit). Thus, when depreciation expense is recorded, there is also a recognition,

or recording, of accumulated depreciation. Accumulated depreciation reduces the rate base for that

portion of plant investment and net salvage already recouped through rates. R. Hahne, Accounting

for Public Utilities, (MB) Rel. No. 23, at 4-15 (October 2006). If depreciation expense is known and

measurable, accumulated depreciation is also known and measurable.

The Illinois Administrative Code (Administrative Code) provides that a utility's revenue

requirement may be calculated by beginning with costs incurred during a 12-month period known as

a "test year," which may be either an historical or a future period. 83 Ill. Adm. Code §287.20,

adopted at 27 Ill. Reg. 12380, 12382, eff. August 1, 2003. If an historical test year is chosen, the

utility uses any consecutive 12-month period, beginning no more than 24 months before the utility's

filing new tariffs, for which actual data are available at the time of filing. 83 Ill. Adm. Code §287.20,

adopted at 27 Ill. Reg. 12380, 12382, eff. August 1, 2003. The supreme court has explained that the

purpose of the test year rules is "to prevent a utility from overstating its revenue requirement by

mismatching low revenue data from one year with high expense data from a different year." BPI II,

146 Ill. 2d at 238.

The historical data may be subject to "pro forma adjustments," which are estimated or

calculated adjustments that reflect certain known and measurable changes in post-test-year data as

specified in the rules. 83 Ill. Adm. Code §§287.20, 287.40, adopted at 27 Ill. Reg. 12380, 12382-84,

eff. August 1, 2003. The pro forma adjustments must reflect changes affecting the ratepayers in plant

investment, operating revenues, expenses, and cost of capital where such changes occurred during

-15-
Nos. 2--08--0959, 2--08--1037, 2--08--1137, 1--08--3008,
1--08--3030, 1--08--3054, 1--08--3313 cons.

the selected historical test year or are reasonably certain to occur within 12 months after the filing

date of the tariffs and where the amounts of the changes are determinable. 83 Ill. Adm. Code

§287.40, adopted at 27 Ill. Reg. 12380, 12384, eff. August 1, 2003.

THE RATE CASE

On October 17, 2007, ComEd filed tariffs that incorporated a general increase in rates for

delivering electricity and revised other terms and conditions of service. See 220 ILCS 5/9--201 (West

2006). ComEd proposed no change in the price of the electricity itself. ComEd asserted that a $360

million increase in its delivery rates was necessary because the existing rates were based on costs that

were years out of date.

ComEd used the 2006 calendar year as an historical test year and included certain pro forma

adjustments. ComEd proposed to increase its 2006 rate base investment amount by $1,498,317,000

based on new plant that had been or would be implemented over a 21-month period from January

2007 through September 2008.

On November 28, 2007, the Commission suspended ComEd's proposed tariffs and initiated

the underlying rate case. The Commission assigned two Administrative Law Judges (ALJs) to take

evidence and issue a proposed order. To protect their interests, IIEC, GC Petitioners, and BOMA

intervened. Testimony and documentary exhibits were submitted, and evidentiary hearings were held

from April 28, 2008, to May 5, 2008.

ComEd asserted that its reasonable and prudent delivery costs included the costs of its

investment in new infrastructure placed into service since the last rate case. ComEd sought a pro

forma adjustment to the rate base to include certain new plant that had entered or would enter service

after the 2006 test year but before the end of the third quarter of 2008. ComEd argued that the costs

-16-
Nos. 2--08--0959, 2--08--1037, 2--08--1137, 1--08--3008,
1--08--3030, 1--08--3054, 1--08--3313 cons.

it sought to recover were prudently incurred and reasonable in amount and that the plant it included

in the rate base was used and useful and necessary to provide delivery services.

ComEd and the Staff submitted a joint recommendation to the Commission. First, based on

the evidence, the Commission's rules, and relevant decisions in earlier rate cases, ComEd and the

Staff recommended excluding from ComEd's rate base accumulated depreciation and certain taxes.

ComEd and the Staff opined that the Commission should not reduce the rate base further by

subtracting extra depreciation and deferred taxes, as the intervenors might propose. Second, ComEd

and the Staff recommended that ComEd be allowed to include in the rate base new utility facilities

placed in service through only the second quarter of 2008 if the Commission approved the joint

recommendation as a whole. ComEd's "conditional withdrawal" of its request to include plant

additions from the third quarter of 2008 reduced its requested rate base by about $175 million.

On September 10, 2008, the Commission issued its order authorizing ComEd to file new

tariffs to implement a $273,573,000 rate increase. The new rates were designed to recover an annual

revenue requirement of $1,961,065,000, based in part on the Commission's determination that the

value of ComEd's rate base investment was $6,694,039,000. The Commission concluded that the

value of ComEd's test-year rate base investment should be increased by the amount of its planned

post-test-year plant additions, without recognizing identified post-test-year decreases in existing

investment value. Consistent with the recommendation of ComEd and the Staff, the Commission also

excluded from the rate base the value of the distribution facilities placed in service in the third quarter

of 2008. We address the remaining portions of the Commission's order in our analysis below.

ANALYSIS

-17-
Nos. 2--08--0959, 2--08--1037, 2--08--1137, 1--08--3008,
1--08--3030, 1--08--3054, 1--08--3313 cons.

We give substantial deference to the decisions of the Commission, in light of its expertise and

experience in this area. ComEd, 398 Ill. App. 3d at 514. 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, 398 Ill. App. 3d at 514.

Though we are not bound by the Commission on questions of law, we " 'will give substantial

weight and deference to an interpretation of an ambiguous statute by the agency charged with the

administration and enforcement of the statute,' which in this case is the Commission." ComEd, 398

Ill. App. 3d at 514, quoting Illinois Consolidated Telephone Co. v. Illinois Commerce Comm'n, 95

Ill. 2d 142, 152 (1983). Our review is limited to the following matters: (1) whether the Commission

acted within its authority; (2) whether it made adequate findings to support its decision; (3) whether

the decision was supported by substantial evidence; and (4) whether state or federal constitutional

rights were infringed. ComEd, 398 Ill. App. 3d at 514.

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. 220 ILCS 5/10--201(e)(iii) (West 2006); City of Chicago

v. Illinois Commerce Comm'n, 281 Ill. App. 3d 617, 623-24 (1996) (City of Chicago II). In other

words, it must state the facts essential to its ruling so that the court can properly review the basis for

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

Commission, 279 Ill. App. 3d 824, 833 (1996).

Moreover, "substantial evidence" means more than a mere scintilla; however, it does not have

to rise to the level of a preponderance of the evidence. ComEd, 398 Ill. App. 3d at 514. It is

evidence that a " 'reasoning mind would accept as sufficient to support a particular conclusion.' "

-18-
Nos. 2--08--0959, 2--08--1037, 2--08--1137, 1--08--3008,
1--08--3030, 1--08--3054, 1--08--3313 cons.

ComEd, 398 Ill. App. 3d at 514, quoting Citizens Utility Board v. Illinois Commerce Comm'n, 291

Ill. App. 3d 300, 304 (1997). "Our supreme court has held that deference to the Commission is

'especially appropriate in the area of fixing rates.' " ComEd, 398 Ill. App. 3d at 514, quoting

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

review, this court can neither reevaluate the credibility or weight of the evidence nor substitute its

judgment for that of the Commission. ComEd, 398 Ill. App. 3d at 514.

A. ComEd's Labor Costs:

ComEd Appeal Nos. 2--08--0959 & 2--08--1037

ComEd argues that the Commission erred by denying full recovery of salary and wages of

certain employees. ComEd also argues that its third-quarter 2008 capital additions may be excluded

from its rate base only under the conditions of ComEd's voluntary agreement with the Commission's

Staff. We address the latter argument in the context of IIEC's appeal of that issue.

In calculating its proposed revenue requirement, ComEd included compensation paid to

salaried personnel who supported the delivery services provided to customers. Some of those

personnel spent time on a proposed merger between ComEd's eventual parent company, Exelon

Corporation (Exelon), and Public Service Enterprise Group Corporation (PSEG). ComEd

recognized that this work does not relate to providing electric utility service and should not be

charged to customers. Accordingly, ComEd subtracted $5,281,000 of expenses, called "incremental

merger costs," from its revenue requirement. However, ComEd maintained that no adjustment

should be made to reflect the salaries and benefits of other employees who performed merger-related

activities, because those employees performed the work as unpaid overtime. ComEd sought recovery

of 100% of the labor costs of those employees.

-19-
Nos. 2--08--0959, 2--08--1037, 2--08--1137, 1--08--3008,
1--08--3030, 1--08--3054, 1--08--3313 cons.

GC Petitioners objected to ComEd recovering any labor costs attributable to the employees

who worked on both the merger and utility business. David Effron, an expert called by GC

Petitioners, proposed to reduce ComEd's revenue requirement by an additional $2,546,000, which

represented "non-incremental merger costs," or the entire labor cost of the employees who had

performed their normal utility functions while also performing work related to the merger.

Effron opined that time spent on merger activities in the test year was not necessary for utility

service and that the cost of that time should not be recovered from ratepayers. He disagreed with

ComEd's position that the entire salary and benefits of employees who spent time on merger-related

activities should be included in the operating expenses. Effron opined, "[t]o the extent that the time

of those employees was devoted to merger-related activities, it was not incurred in the provision of

utility service in the test year, and it should not be included in the company's revenue requirement.

It is not clear how the company knows that the time of those employees will be spent performing

utility-related duties prospectively, but even assuming that this is correct, it is also possible that it

would reduce the time of other employees performing such duties." Effron concluded that, if the

employees had performed the merger work for free as ComEd alleges, no cost should be assigned to

that work.

ComEd declined its opportunity to cross-examine Effron. However, Kathryn Houtsma and

Stacie Frank testified in rebuttal for ComEd. They explained that, when the salaried employees at

issue were required to assist with the merger in 2006, they accounted for their time spent on merger

activities by charging hours to a separate project code block. However, extra time that those

employees spent on utility-related activities was not accounted for elsewhere in the salary and benefits

-20-
Nos. 2--08--0959, 2--08--1037, 2--08--1137, 1--08--3008,
1--08--3030, 1--08--3054, 1--08--3313 cons.

costs recorded on ComEd's books. Thus, eliminating any of the wages and benefits of those

employees would understate ComEd's cost of service.

The Commission found that the employees at issue had performed delivery-service work as

well as merger-related work. However, the Commission expressed skepticism as to "whether these

same employees would have performed unpaid overtime on delivery service test year activities if not

for the merger." The Commission further stated, "it is not clear that the expenses claimed by

[ComEd] are representative because of the merger work."

The Commission excluded from the operating costs one-quarter of labor costs associated with

the employees who performed both utility-services and merger-related work. Specifically, the

Commission disallowed $637,000 as merger-related costs, which was one-quarter of the $2,546,000

in labor costs that Effron had identified as unrecoverable. Thus, the Commission rejected GC

Petitioners' proposal to disallow labor costs associated with those employees entirely, but the

Commission did not allow ComEd to recover the costs in full, either. The Commission did not

explain in detail how it chose the 25% deduction.

On appeal, ComEd argues that the Commission's decision to exclude from the operating costs

one-quarter of the costs attributed to the employees who performed utility-services as well as merger-

related work is arbitrary and not supported by substantial evidence. The Commission responds that

ComEd failed to prove that the employees at issue will not continue to handle both recoverable and

unrecoverable work matters in the future. GC Petitioners do not renew their argument that the labor

costs of the employees should be excluded entirely.

The parties correctly agree that merger-related expenses are unrecoverable. Thus, the

Commission's decision to exclude one-quarter of the challenged labor costs presents two issues: (1)

-21-
Nos. 2--08--0959, 2--08--1037, 2--08--1137, 1--08--3008,
1--08--3030, 1--08--3054, 1--08--3313 cons.

whether any of the labor costs are attributable to the merger and, (2) if so, how much should be

excluded from the operating expenses component of the revenue requirement.

In this case, the Commission's factual findings are adequate because they are specific enough

to enable this court to make an informed and intelligent review of its order. See 220 ILCS 5/10--

201(e)(iii) (West 2006); City of Chicago II, 281 Ill. App. 3d at 623-24. Moreover, the Commission

heard substantial evidence to support excluding from the revenue requirement some of the challenged

labor costs. Making a credibility determination, the Commission rejected ComEd's assertion that the

employees performed no merger-related work during regular work hours, and the Commission

expresses continued skepticism of ComEd's position on appeal. We agree with the Commission that

"[a]lthough the Commission partially rejected GC Petitioners' proposed 100% disallowance of the

labor costs for employees who allegedly spent unpaid overtime working on the merger, this does not

mean that the Commission is obliged to accept a ComEd position which strains credulity; that the

work performed by these salaried ComEd employees on merger issues for ComEd and its related

affiliates was somehow a matter unrelated to their employment." Indeed, Houtsma and Frank

testified for ComEd that the employees were required to perform the merger-related work as part of

their employment. This court may neither reevaluate the credibility or weight of the evidence nor

substitute its judgment for that of the Commission. ComEd, 398 Ill. App. 3d at 514. Substantial

evidence supports the Commission's conclusion that at least some merger-related work was

compensated and that ComEd might compensate additional work unrelated to delivery service in the

future.

The Commission did not explain in its order why it chose to disallow one-quarter of the

challenged labor costs, rather than some other amount. The Commission argues that, once it

-22-
Nos. 2--08--0959, 2--08--1037, 2--08--1137, 1--08--3008,
1--08--3030, 1--08--3054, 1--08--3313 cons.

identifies a recoverable cost item, such as the labor costs related to the utility-services work

performed by the employees, the Commission is not authorized to treat the expense as zero. See

Central Illinois Public Service Co. v. Illinois Commerce Comm'n, 5 Ill. 2d 195, 208 (1955) ("when

a proponent of a rate change has presented sufficient evidence of his present costs and other material

factors, the Commission cannot refuse to pass upon the reasonableness of the proposed change

merely because unavoidable uncertainties of economic forecasting make it difficult to project those

current figures into the future").

In arguing that we must affirm its calculation, the Commission cites Du Page Utility Co. v.

Illinois Commerce Comm'n, 47 Ill. 2d 550 (1971), for the proposition that, in the absence of evidence

indicating an appropriate cost recovery from 100% recovery to 100% denial, the Commission is

authorized to choose an appropriate amount. In Du Page Utility Co., the Commission disallowed as

an operating expense one-half of the compensation of three company officers because the claimed

compensation was excessive and out of proportion to the services performed. Du Page Utility Co.,

47 Ill. 2d at 560. The utility challenged the deduction as arbitrary, but the supreme court called the

argument facetious. The officers admitted that they had no previous experience in managing a utility,

they had worked only part time, and they had maintained only minimal contact with the day-to-day

operations. Du Page Utility Co., 47 Ill. 2d at 560. None of the officers could produce records of

time spent at the utility business, none maintained an office there, and each was active as president

of one of three different construction firms. Du Page Utility Co., 47 Ill. 2d at 560. Thus, the

supreme court determined that "the Commission was correct in its finding that the larger salaries were

not justified." Du Page Utility Co., 47 Ill. 2d at 560.

-23-
Nos. 2--08--0959, 2--08--1037, 2--08--1137, 1--08--3008,
1--08--3030, 1--08--3054, 1--08--3313 cons.

However, the supreme court rejected the intervenors' attempt to go further and disallow the

officers' salaries entirely. Du Page Utility Co., 47 Ill. 2d at 561. The court concluded that such a

result would be arbitrary and against the manifest weight of the evidence in light of the officers'

uncontradicted testimony that they performed part-time services that added value to the company.

Du Page Utility Co., 47 Ill. 2d at 561. Showing the Commission deference, the court affirmed the

decision to disallow one-half of the compensation of the officers.

Here, the Commission takes the position that it has wide latitude to use its "business

judgment" to reach "pragmatic solutions" by filling gaps in the record. To the extent that the

Commission's decisions are not arbitrary or capricious and are rooted in credibility determinations,

we agree. In Du Page Utility Co., the supreme court affirmed the Commission's 50% deduction of

certain labor costs even though the Commission did not set forth detailed reasons for why it chose

that percentage. This case compels a similar result. While we might have found the unrecoverable

merger-related labor costs to constitute a different percentage of the costs at issue, our deferential

standard of review compels us to affirm the Commission's decision to deduct 25% of the challenged

costs.

B. Accumulated Depreciation of Existing Plant During Post-Test-Year Period:

IIEC Appeal No. 1--08--3313

As noted, the Administrative Code permitted ComEd to calculate its revenue requirement by

beginning with costs incurred during a 12-month period known as a "test year," which may be either

an historical or future period. See 83 Ill. Adm. Code §287.20, adopted at 27 Ill. Reg. 12380, 12382,

eff. August 1, 2003. Using data from January 1, 2006, to December 31, 2006, as an historical test

year, ComEd calculated its 2006 rate base, which is the plant investment used in setting rates, as

-24-
Nos. 2--08--0959, 2--08--1037, 2--08--1137, 1--08--3008,
1--08--3030, 1--08--3054, 1--08--3313 cons.

$5,572,917,000. ComEd used its gross plant investment, accumulated depreciation, and accumulated

deferred income tax amounts to make the calculation.

The Administrative Code allowed ComEd to make pro forma adjustments to its rate base,

including additional plant investment that had occurred or is "reasonably certain to occur subsequent

to the historical test year within 12 months after the filing date of the tariffs and where the amounts

of the charges are determinable." 83 Ill. Adm. Code. §287.40, adopted at 27 Ill. Reg. 12380, 12384,

eff. August 1, 2003. ComEd filed its tariffs on October 17, 2007, and thus was authorized to include

pro forma adjustments from the end of the 2006 test year through the first three quarters of 2008.

See 83 Ill. Adm. Code §287.40, adopted at 27 Ill. Reg. 12380, 12384, eff. August 1, 2003.

ComEd's proposed pro forma adjustments increased the rate base by $1,498,317,000. The

post-test-year adjustment represented mainly plant additions that ComEd planned to make from

January 2007 through September 2008, which was the 21-month period following the test year.

However, ComEd's increase in accumulated depreciation from January 2007 through September 2008

related only to the new, pro forma plant additions. ComEd failed to account for the way the existing

embedded plant would accrue additional accumulated depreciation during the post-test-year period.

Factoring in this increase in accumulated depreciation would reduce the net value of ComEd's existing

plant, which would create a corresponding reduction in the rate base.

IIEC proposed an adjustment to recognize the increase in accumulated depreciation of the

existing plant during the 21-month period of ComEd's planned plant additions. Michael Gorman, an

IIEC expert, testified that ComEd's rate base must be adjusted to account for all known and

measurable post-test-year changes to the test-year net plant investment. Gorman calculated that

-25-
Nos. 2--08--0959, 2--08--1037, 2--08--1137, 1--08--3008,
1--08--3030, 1--08--3054, 1--08--3313 cons.

ComEd's failure to make the matching adjustment would overstate the utility's rate base by

$654,505,000, which would result in $93,560,000 in excessive rates per year.

Effron, GC Petitioners' expert, opined that the growth in accumulated depreciation during the

post-test-year period is a change that is known and measurable with absolute certainty. Therefore,

he opined, it is "clearly inconsistent" for the rate base to reflect plant in service through the end of

the post-test-year period but reflect a balance of accumulated depreciation only through the end of

the test year.

ComEd and the Staff reached a stipulation on the issue and submitted a recommendation to

the Commission. According to the stipulation, ComEd would voluntarily elect not to seek recovery

of the cost of plant additions made in the third quarter of 2008. ComEd and the Staff proposed an

18-month post-test-year period of capital additions instead of the 21 months that ComEd had

originally requested, and, in exchange, the Staff would recommend that, among other things, the

Commission not subtract from the rate base the existing plant's accumulated depreciation during the

post-test-year period. By its terms, the stipulation was effective only if the Commission approved

all of its provisions.

The ALJs who presided over the evidentiary phase of the case issued a proposed order to the

Commission that would allow ComEd to include in its rate base the cost of post-test-year plant

additions, but only "to the extent they exceed accumulated depreciation." In its September 10, 2008,

order, the Commission allowed ComEd to include in its rate base the post-test-year plant additions

but reversed the ALJs' recognition of the change in accumulated depreciation of the existing plant as

an offset to the value of the post-test-year plant additions.

-26-
Nos. 2--08--0959, 2--08--1037, 2--08--1137, 1--08--3008,
1--08--3030, 1--08--3054, 1--08--3313 cons.

Consistent with the ComEd/Staff stipulation, the Commission's order included in the rate base

"pro forma capital additions through June 2008 with no reflection of the increase in the accumulated

reserve for depreciation on embedded [existing] plant." Thus, the Commission allowed ComEd to

avoid the offset for accumulated depreciation of existing plant during the post-test-year period in

exchange for forfeiting recovery of the cost of the third quarter 2008 plant additions.

On November 7, 2008, two of the five Commissioners filed a dissenting opinion against the

majority's refusal to account for the contemporaneous change in post-test-year accumulated

depreciation. The dissent stated that deducting accumulated depreciation in the calculation of a rate

base should prevent the utility from earning a further return on investment that has already been

recovered through depreciation expense. The dissent concluded that "the failure to record

accumulated depreciation on existing embedded plant in the post-test-year period, in which additional

plant is being factored into rate base, provides a windfall for the utility and provides an opportunity

for the utility to over-earn between rate cases. This action clearly encourages other utilities to extend

the duration of the test period as far as possible."

IIEC agrees with the Commission's dissenting opinion. IIEC makes three related arguments

in support of the conclusion that the Commission erroneously increased ComEd's rate base by failing

to recognize the offset of post-test-year accumulated depreciation in the existing plant. First, IIEC

argues that the Commission exceeded its authority because the rate base increase violates section 9--

211 of the Act. Second, IIEC argues that the Commission violated sections 287.20 and 287.40 of

title 83 of the Administrative Code, as well as established test-year principles, by mismatching 2008

gross plant investment and 2006 test-year accumulated depreciation. Third, IIEC argues that the

Commission's decision was distorted by its misapprehension that past decisions affected its duty and

-27-
Nos. 2--08--0959, 2--08--1037, 2--08--1137, 1--08--3008,
1--08--3030, 1--08--3054, 1--08--3313 cons.

authority to decide this case based only on the record before it. GC Petitioners concur in IIEC's

position.

1. Section 9--211 of the Act

The Act requires the Commission to establish "just and reasonable" rates. 220 ILCS 5/9--101

(West 2006). Section 9--211 of the Act provides that a utility's rate base may include "only the value

of such investment which is both prudently incurred and used and useful in providing service to public

utility customers." (Emphasis added.) 220 ILCS 5/9--211 (West 2006). To determine just and

reasonable rates, a utility's rate base, operating costs, and revenues are matched over the test year.

BPI II, 146 Ill. 2d at 237-38. Here, the dispute on the accumulated depreciation issue is not whether

the planned plant additions will be used and useful, but how to measure the value of all the plant in

service.

Accumulated depreciation reduces plant investment at original cost by the decline in

investment value recorded in the reserve for accumulated depreciation, and it is the basis for

determining the capital cost component (rate of return x rate base) of the utility's revenue

requirement. Heinz, ComEd's expert, testified that customers pay only for net plant, not for gross

plant, which is the cost of the plant at the time of installation. Heinz admitted that ComEd had

accounted for depreciation expense and that the accumulated depreciation reduces rate base.

We agree with IIEC and GC Petitioners that the Commission departed from standard utility

cost accounting when it used gross plant to measure ComEd's rate base in the new plant additions.

In every context other than the post-test-year plant addition proposal, ComEd and the Staff calculated

ComEd's rate base investment by offsetting gross plant investment with the accumulated depreciation

on all plant in service. ComEd and the Staff accounted for accumulated depreciation for the existing

-28-
Nos. 2--08--0959, 2--08--1037, 2--08--1137, 1--08--3008,
1--08--3030, 1--08--3054, 1--08--3313 cons.

plant during the 2006 test year and for the plant additions during the post-test-year period, but they

did not account for accumulated depreciation of the existing plant during the post-test-year period.

We conclude that the Commission miscalculated the value of the plant investment by

recognizing increases in rate base investment value due to post-test-year additions without

recognizing contemporaneous offsetting decreases in the value of that investment attributable to

ongoing depreciation. Section 9--211 essentially requires the Commission to ensure that a utility's

approved rate base does not exceed the investment value that the utility actually uses to provide

service. The measure of the amount of investment so dedicated must account for both increases and

decreases over a consistent period. Under section 9--211, contemporaneous increases and decreases

to rate base are not severable items that can be given disparate treatments. The utility's plant in

service and net plant are opposing sides of a coin. The Commission approved a rate base that

exceeds the investment value ComEd actually dedicates to utility services. The approval of excess

rate base violates section 9--211 by overstating ComEd's revenue requirement. See 220 ILCS 5/9--

211 (West 2006).

2. The Administrative Code and Test-Year Principles

IIEC argues that the Commission violated sections 287.20 and 287.40 of title 83 of the

Administrative Code, as well as corresponding test-year principles, by mismatching 2008 gross plant

investment and 2006 test year accumulated depreciation.

The Commission's rules give a utility the discretion to request pro forma adjustments to

historical data in the post-test-year period, but those adjustments must account for "all known and

measurable changes." 83 Ill. Adm. Code §§287.20, 287.40, adopted at 27 Ill. Reg. 12380, 12382-84,

eff. August 1, 2003. Specifically, the Administrative Code requires that the pro forma adjustments

-29-
Nos. 2--08--0959, 2--08--1037, 2--08--1137, 1--08--3008,
1--08--3030, 1--08--3054, 1--08--3313 cons.

to an historical test year "shall reflect changes affecting the ratepayers in plant investment, operating

revenues, expenses, and cost of capital where such changes occurred during the selected historical

test year or are reasonably certain to occur subsequent to the historical test year within 12 months

after the filing date of the tariffs and where the amounts of the changes are determinable." (Emphasis

added.) 83 Ill. Adm. Code §287.40, adopted at 27 Ill. Reg. 12380, 12384, eff. August 1, 2003. The

increase in the accumulated depreciation on the existing plant during the post-test-year period, in

which the additional plant is being factored into the rate base, is a change that affects ratepayers and

therefore must be factored into the rate base. See 83 Ill. Adm. Code §287.40, adopted at 27 Ill. Reg.

12380, 12384, eff. August 1, 2003.

Our conclusion is supported by BPI II. In that case, the utility argued that depreciation is not

subject to test-year principles because, if those principles applied, utilities would be forced to choose

between filing yearly rate cases or forgoing recovery of the costs of construction incurred during that

year. BPI II, 146 Ill. 2d at 238-39. The supreme court disagreed, concluding that depreciation is

subject to test-year principles for the following reasons:

"The rationale for capitalizing construction costs does not mean that depreciation is

not an expense. The plants have limited useful lives, and each year that a plant is in service

a portion of its useful life is expended. Depreciation recognizes the cost of that portion of the

asset which is expended in a given year, regardless of the time period in which the

construction costs were actually paid. Thus, even though there is no cash outlay in the

current year, depreciation is treated as an operating expense for financial reporting purposes,

and more importantly for purposes of determining [the utility's] revenue requirement. For this

-30-
Nos. 2--08--0959, 2--08--1037, 2--08--1137, 1--08--3008,
1--08--3030, 1--08--3054, 1--08--3313 cons.

reason, we hold that depreciation is an expense subject to test-year principles." BPI II, 146

Ill. 2d at 239.

Accumulated depreciation is simply the amount of a long-term asset's cost that has been

allocated to depreciation expense since the asset was acquired. As depreciation of the asset's cost

is treated as a recoverable operating expense, accumulated depreciation must also be recognized as

a reduction to the rate base for that portion of plant investment and net salvage recouped from the

rates. Consistent with the matching requirement, accumulated depreciation is subject to test-year

principles because depreciation expense is subject to test-year principles. See BPI II, 146 Ill. 2d at

239. We agree with IIEC and GC Petitioners that ignoring the decline in value of the embedded plant

during the post-test-year period artificially boosted the value of ComEd's rate base in violation of test-

year principles.

ComEd's reading of the test-year principles to exclude accumulated depreciation for the pro

forma period creates an incentive for the utility to always seek upward pro forma adjustments,

regardless of any decline in actual net plant, so the utility can recover an amount that ignores

accompanying depreciation accumulating over the same period. This interpretation results in a

consistently and unavoidably inflated rate base and an inescapably inaccurate picture of the utility's

finances. ComEd's interpretation is plainly inconsistent with the Commission's treatment of plant

investment where the utility adopts a future test year under section 287.20(b). ComEd's

interpretation also is plainly inconsistent with basic matching principles. We hold that, under these

circumstances, the Commission abused its discretion.

3. Precedential Effect of the Commission's Prior Decisions

-31-
Nos. 2--08--0959, 2--08--1037, 2--08--1137, 1--08--3008,
1--08--3030, 1--08--3054, 1--08--3313 cons.

IIEC argues that the Commission's decision on the accumulated depreciation issue was

distorted by its misapprehension that past decisions affected its duty and authority to decide this case

exclusively on the record presented. GC Petitioners concur in IIEC's position. The Commission's

decision, in part, relied upon three of its prior decisions: (1) docket No. 05-0597 (appealed in No.

2--06--1284); (2) docket No. 01--0423; and (3) docket Nos. 07--0241 and 07--0242 (appealed in No.

1--08--2055). The Commission referred to those decisions as "settled precedent" that barred

departure from the one-sided post-test-year adjustments. The Commission feared that reaching a

contrary result would invite a charge of acting arbitrarily and capriciously.

Illinois courts have consistently held that "decisions of the Commission are not res judicata."

See, e.g., A. Finkl & Sons Co. v. Illinois Commerce Comm'n, 250 Ill. App. 3d 317, 323 (1993). The

concept of public regulation requires that the Commission have power to deal freely with each

situation that comes before it, regardless of how it may have dealt with a similar or even the same

situation in a previous proceeding. Mississippi River Fuel Corp. v. Illinois Commerce Comm'n, 1 Ill.

2d 509, 513 (1953). A record containing new evidence or argument that implicates past decisions

compels reconsideration on the new record and may require a different result. See 220 ILCS 5/10--

103 (West 2006) ("any finding, decision or order made by the Commission shall be based exclusively

on the record for decision in the case"). Thus, we agree with IIEC that the decisions the Commission

cited as precedent did not compel the Commission to disregard the increase in accumulated

depreciation of the embedded plant during the post-test-year period.

4. Remand

In its appellate brief, ComEd anticipates the argument of IIEC and GC Petitioners that the

Commission erred in failing to recognize the increase in the accumulated depreciation. ComEd

-32-
Nos. 2--08--0959, 2--08--1037, 2--08--1137, 1--08--3008,
1--08--3030, 1--08--3054, 1--08--3313 cons.

argues that, if we reverse any part of the Commission's approval of the stipulation, we must remand

the cause to afford ComEd the opportunity to include in its rate base its third-quarter 2008 plant

additions. ComEd contends that the exclusion of the additions can be sustained only under the

conditions of ComEd's voluntary agreement with the staff not to include them. ComEd argues that,

if the stipulation is voided, it would be "manifestly unfair" to exclude from the rate base plant

additions that ComEd would be entitled to include. ComEd implies that we should remand the cause

with directions for the Commission to add to the rate base the third-quarter 2008 plant additions

because, according to ComEd, the same type of evidence that the Commission accepted as supporting

ComEd's plant additions through the second quarter of 2008 also supports including ComEd's third-

quarter additions.

GC Petitioners respond that ComEd's voluntary forfeiture of the recovery of the third-quarter

additions was a waiver of an earlier claim for greater recovery that was "strategically abandoned."

Thus, GC Petitioners argue that we should remand the case with directions for the Commission to

deduct from the rate base the accumulated depreciation that the Commission erroneously omitted,

without allowing ComEd to petition for recovery of the third-quarter additions. While we agree that

the Commission abused its discretion in failing to account for the accumulated depreciation of the

existing plant during the post-test-year period, we conclude that unilaterally altering the ComEd/Staff

stipulation would be manifestly unfair to ComEd.

However, we also reject ComEd's proposal that we direct the Commission to include the

third-quarter additions to the rate base. The Commission did not enter findings of fact regarding the

third-quarter 2008 additions, and the Commission is the fact-finding body. BPI II, 146 Ill. 2d at 196

-33-
Nos. 2--08--0959, 2--08--1037, 2--08--1137, 1--08--3008,
1--08--3030, 1--08--3054, 1--08--3313 cons.

("In the ratemaking scheme, the Commission and not the court is the fact-finding body"). Apart from

examining whether the Commission acted outside the scope of its authority or infringed upon a

constitutional right, a court is limited to reviewing whether the Commission set out adequate findings

of fact supporting its decision and whether the findings are against the manifest weight of the

evidence. BPI II, 146 Ill. 2d at 196. Considering that the Commission has not had the opportunity

to make findings of fact regarding the third-quarter 2008 plant additions, we decline to direct the

Commission to take any action on remand other than allowing ComEd to petition for their inclusion

in the rate base.

C. Rider SMP: System Modernization Project:

GC Petitioners (AG/CUB) Appeal Nos. 1--08--3008 & 1--08--3030

GC Petitioners argue that the Commission erred in increasing ComEd's rate base. First, GC

Petitioners echo IIEC's argument that the Commission violated its rules by failing to account for

accumulated depreciation, resulting in unjust and unreasonable rates and an overvalued rate base, in

violation of the Act. Second, GC Petitioners argue that a provision known as Rider SMP is contrary

to settled ratemaking principles and is not justified by the evidence. We addressed the accumulated

depreciation issue in the context of IIEC's appeal.

ComEd proposed Rider SMP, a "system modernization project" charge to customers, to

immediately recoup the costs of modernizing its delivery system toward a "smart grid." According

to ComEd, the rider was new and innovative and created a mechanism for funding discretionary

projects that are not necessary for the distribution service. One of the building blocks of the

technology is advanced metering infrastructure (AMI), which consists of a communication system,

advanced meters, and computer software and hardware to process the information collected from the

-34-
Nos. 2--08--0959, 2--08--1037, 2--08--1137, 1--08--3008,
1--08--3030, 1--08--3054, 1--08--3313 cons.

new meters. The first step toward an AMI system is a pilot program called "Phase 0," which involves

installing 200,000 advanced meters. AMI would allow ComEd to achieve cost savings and improved

efficiency by phasing out 675 full-time meter reader and supervisor positions, eliminating meter

reading equipment, improving bill collections, reducing billing errors, and disconnecting nonpaying

customers more efficiently. ComEd argued that Rider SMP would give customers the benefits of the

technology earlier than might otherwise occur, because ComEd could not afford the project without

the rider. As proposed, ComEd would provide the Commission with an annual list of projects for

Rider SMP treatment. The Commission would have an opportunity to approve or deny recovery for

each project, but the Commission could not alter the list.

The Commission approved Rider SMP for the limited purpose of implementing Phase 0,

commending ComEd for its initiative in pursuing a smart grid but criticizing ComEd for taking a

project-by-project approach without a clear goal. The Commission noted that "[t]he estimates of cost

in the record have varied greatly and the estimates of benefits have been sporadic at best." The

Commission further found that "[t]he lack of a consistent, thorough analytic approach to estimating

[smart grid] benefits simply highlights another shortcoming: ComEd is asking for special recovery

for these projects that--whatever their level, all parties agree--could have long-term economic

benefits, but as proposed, ratepayers do not share the economic benefits." The Commission ruled

that, after the completion of Phase 0, ComEd may file Rider SMP again to seek recovery for

additional smart grid investments.

GC Petitioners argue that we must reverse the approval of Rider SMP because (1) Rider SMP

violates the rule against single-issue ratemaking; (2) Rider SMP violates the rule against retroactive

ratemaking; (3) Rider SMP violates test-year principles; and (4) ComEd did not prove that Rider

-35-
Nos. 2--08--0959, 2--08--1037, 2--08--1137, 1--08--3008,
1--08--3030, 1--08--3054, 1--08--3313 cons.

SMP is necessary. We conclude that the Commission committed reversible error because Rider SMP

is not supported by substantial evidence. Rider SMP is a classic example of improper single-issue

ratemaking because AMI is the type of cost that should be addressed through normal ratemaking

procedures. Because we conclude that Rider SMP amounts to improper single-issue ratemaking, we

need not consider GC Petitioners' alternative arguments for invalidating it.

The rule against single-issue ratemaking makes it improper to consider in isolation changes

in particular portions of a utility's revenue requirement. 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. BPI II, 146 Ill.

2d at 244. 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. BPI II, 146 Ill. 2d at 244; Finkl, 250 Ill. App. 3d at 325. 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. BPI II, 146 Ill. 2d at 244.

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. Citizens Utility Board v. Illinois Commerce Comm'n, 166 Ill. 2d 111,

137 (1995). However, a rider, or automatic adjustment, can change a rate without requiring a utility

to delay recovery until it files a general rate case. Citizens Utility Board, 166 Ill. 2d at 133. In its

most recent pronouncement on the issue, the supreme court described riders as follows:

-36-
Nos. 2--08--0959, 2--08--1037, 2--08--1137, 1--08--3008,
1--08--3030, 1--08--3054, 1--08--3313 cons.

"[A] rider mechanism merely facilitates direct recovery of a particular cost, without direct

impact on the utility's rate of return. The prohibition against single-issue ratemaking requires

that, in a general base rate proceeding, the Commission must examine all elements of the

revenue requirement formula to determine the interaction and overall impact any change will

have on the utility's revenue requirement, including its return on investment. The rule does

not circumscribe the Commission's ability to approve direct recovery of unique costs through

a rider when circumstances warrant such treatment." Citizens Utility Board, 166 Ill. 2d at

138.

Because a rider is a method of single-issue ratemaking, by nature, it is not allowed absent a

showing of exceptional circumstances. Finkl, 250 Ill. App. 3d at 326. The risk of single-issue

ratemaking requires that all riders be closely scrutinized to prevent understatement or overstatement

of the overall revenue requirement. City of Chicago II, 281 Ill. App. 3d at 627. However, 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. City of Chicago v. Illinois Commerce Comm'n, 13 Ill. 2d 607,

614 (1958) (City of Chicago I).

1. City of Chicago I

In City of Chicago I, the supreme court highlighted the Commission's discretion in selecting

the means by which rates are set and costs are recovered and determining the appropriateness of the

rider mechanism in certain circumstances. In that case, the intervenors contested an order approving

the utility's tariff revision providing for a rider to reflect changes in its wholesale cost of natural gas.

In approving the rider, the supreme court noted that the Act, taken as a whole, contemplates that the

Commission's power is not limited to determining a mere charge or a particular rate; rather, the

-37-
Nos. 2--08--0959, 2--08--1037, 2--08--1137, 1--08--3008,
1--08--3030, 1--08--3054, 1--08--3313 cons.

Commission has the power to change, under certain conditions, any part of a rate schedule, rule, or

regulation that in any manner affects the rates charged. City of Chicago I, 13 Ill. 2d at 611. The

intervenors challenged the rider on the basis that the gas pipeline company, which purchased or

produced the gas, was a subsidiary of the distributing company, and thus the distributing company

had indirect control over the gas prices it paid. City of Chicago I, 13 Ill. 2d at 614. The supreme

court rejected the argument, noting that wholesale gas prices were regulated by federal law that

granted the Federal Power Commission authority to fix rates. City of Chicago I, 13 Ill. 2d at 614.

2. Finkl

In Finkl, the Commission approved a rider so the utility could recover costs associated with

certain demand-side management programs. Finkl, 250 Ill. App. 3d at 319. The Commission

concluded that the rider was the most appropriate method of recovery of the costs because " 'the

actual expenses are difficult to predict in advance, especially given the fact that neither the

Commission nor [the utility] has extensive experience in the implementation of [demand-side] analysis

and programs, and may fluctuate from year to year and from month to month.' " Finkl, 250 Ill. App.

3d at 322. The Appellate Court, First District, reversed, concluding that the rider violated the

prohibition against single-issue ratemaking because the Commission had authorized the utility to

charge customers for the demand-side management program costs without considering whether other

factors offset the need for additional charges. Finkl, 250 Ill. App. 3d at 326. The order was an abuse

of discretion because it isolated one operating expense for full recovery without considering whether

changes in other expenses or increased sales and income obviated the need for increased charges to

consumers. Failing to account for such an offset might have resulted in impermissibly charging

-38-
Nos. 2--08--0959, 2--08--1037, 2--08--1137, 1--08--3008,
1--08--3030, 1--08--3054, 1--08--3313 cons.

ratepayers more to cover the utility's expenses and pay a return to its investors. Finkl, 250 Ill. App.

3d at 326.

The costs covered by the rider in Finkl involved payroll for specifically identified planning and

similar positions; personnel training, education, and travel; contractors' and consultants' costs;

out-of-pocket promotion and computer costs; and conducting workshops. Finkl, 250 Ill. App. 3d

at 327. The First District concluded that "[s]uch costs reveal no greater potential for unexpected,

volatile or fluctuating expenses which [the utility] cannot control, than costs incurred in estimating

base ratemaking." Finkl, 250 Ill. App. 3d at 327.

3. CILCO

In Central Illinois Light Co. v. Illinois Commerce Comm'n, 255 Ill. App. 3d 876 (1993)

(CILCO), the First District found that the Commission had not abused its discretion in allowing a

rider mechanism for the utility to recover certain coal tar remediation costs. CILCO, 255 Ill. App.

3d at 885. The court noted that the costs were expected to vary widely from year to year, depending

on the type of remediation activities: from a few thousand dollars for investigation costs to millions

of dollars for cleanup costs. The court viewed the costs as the type of unexpected, volatile, and

fluctuating costs that are more efficiently addressed through a rider mechanism. CILCO, 255 Ill.

App. 3d at 885.

The CILCO court interpreted Finkl as holding simply that the Commission had abused its

discretion in allowing a rider recovery mechanism for the demand-side management costs at issue.

The CILCO court did not read Finkl broadly "as holding that the Commission does not have the

authority to allow recovery of costs through riders." CILCO, 255 Ill. App. 3d at 885.

4. City of Chicago II

-39-
Nos. 2--08--0959, 2--08--1037, 2--08--1137, 1--08--3008,
1--08--3030, 1--08--3054, 1--08--3313 cons.

In City of Chicago II, the city charged the utility a franchise fee for customers living within

the municipality, and the utility recovered the expense through the general rates it charged all its

customers. Finding the recovery unfair, the Commission ordered the utility to remove local franchise

fees and other franchise costs from base rates for all its customers and to localize recovery of those

costs by adding a separate line-item charge on the bills of customers who reside in the city. Under

the order, residents of the city were to pay a pro rata share of the franchise fee that the city charged

the utility, while residents of other municipalities were to pay their share of franchise costs imposed

by their own municipalities. City of Chicago II, 281 Ill. App. 3d at 619.

The First District affirmed the Commission's proposed restructuring of the rates, again noting

that Finkl did not limit the use of a rider to only those cases where expenses are unexpected, volatile,

or fluctuating. City of Chicago II, 281 Ill. App. 3d at 628. The court concluded that the rider was

"a reallocation which did not have any impact whatsoever on [the utility's] overall revenue

requirement." City of Chicago II, 281 Ill. App. 3d at 629. The court emphasized that the franchise

fee already was included in the utility's overall rate structure and, therefore, the rider merely facilitated

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

Chicago II, 281 Ill. App. 3d at 629.

5. Citizens Utility Board

In Citizens Utility Board, the Commission approved a rider allowing electric utilities to

recover expenses created by their liability under federal and state environmental law. The costs at

issue were incurred to remediate environmental damage from coal tar residue found at former

manufactured-gas-plant sites. Citizens Utility Board, 166 Ill. 2d at 116. Noting that a rider

mechanism is effective and appropriate for cost recovery when a utility is faced with unexpected,

-40-
Nos. 2--08--0959, 2--08--1037, 2--08--1137, 1--08--3008,
1--08--3030, 1--08--3054, 1--08--3313 cons.

volatile, or fluctuating expenses, the supreme court concluded that using the rider mechanism, outside

the context of a traditional rate proceeding, did not violate the prohibition against single-issue

ratemaking. Citizens Utility Board, 166 Ill. 2d at 139. The court emphasized the Commission's

finding that there were wide variations and difficulties in forecasting the costs of investigation and

remediation activities. Citizens Utility Board, 166 Ill. 2d at 138. Thus, the court held that "riders can

generally be expected to provide a more accurate and efficient means of tracking costs and matching

such costs with recoveries than would base rate recovery methods." Citizens Utility Board, 166 Ill.

2d at 138-39.

From this line of cases, we glean a guiding principle for testing a rider's validity: the

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 (Citizen's Utility Board, 166 Ill. 2d at 138

("a rider mechanism is effective and appropriate for cost recovery when a utility is faced with

unexpected, volatile, or fluctuating expenses")) and the expense is a pass-through item that does not

change other expenses or increase income (Citizen's Utility Board, 166 Ill. 2d at 138 (a valid rider has

no "direct impact on the utility's rate of return")).

Our test reconciles the approval of diverse riders, including (1) a rider to recoup increases in

the wholesale cost of natural gas, where the cost was set by a federal agency (City of Chicago I, 13

Ill. 2d at 614); (2) a rider to recoup expenses for government-mandated environmental remediation

(Citizens Utility Board, 166 Ill. 2d at 138-39; CILCO, 255 Ill. App. 3d at 885); and (3) a rider to

recoup a franchise fee that a municipality charges the utility (City of Chicago II, 281 Ill. App. 3d at

-41-
Nos. 2--08--0959, 2--08--1037, 2--08--1137, 1--08--3008,
1--08--3030, 1--08--3054, 1--08--3313 cons.

628-29). In each instance, the expense was an externality imposed on the utility, and the expense was

passed directly on to the consumer without affecting the utility's return on investment.

Our test also explains the rejection of the rider for payroll expenses of demand-side

management programs (Finkl, 250 Ill. App. 3d at 327). In Finkl, the rider was declared invalid

because the proposed recovery was for expenses that were completely within the utility's control.

Furthermore, the Commission had not considered whether changes in other expenses or increased

sales and income obviated the need for the added charges to customers. Finkl, 250 Ill. App. 3d at

326.

Rider SMP does not meet the criteria to warrant single-issue ratemaking. The expenses

related to AMI and the smart grid technologies, including Phase 0, are not unexpected, volatile, or

fluctuating, as ComEd alone dictates the program's scope and, therefore, its costs. The capital costs

associated with AMI and the smart grid technologies are not the result of legislative mandate, but

rather are the result of ComEd's decision to innovate to reduce other costs. ComEd can cover the

expenses by a fiscal and operational plan that is completely within the utility's control. The

Commission heard no evidence that the system modernization costs might produce unacceptable

financial outcomes if not afforded special treatment.

In fact, ComEd proposed Rider SMP precisely because the improvements are expected to

reduce other expenses and increase income in the long term, which affects the utility's revenue

requirement. To allow Rider SMP would be to improperly consider in isolation changes in a

particular portion of a utility's revenue requirement. See BPI II, 146 Ill. 2d at 244. The system

modernization program is desirable precisely because the increased costs would be more than offset

by a positive, corresponding change in another component of the revenue requirement formula.

-42-
Nos. 2--08--0959, 2--08--1037, 2--08--1137, 1--08--3008,
1--08--3030, 1--08--3054, 1--08--3313 cons.

Increasing the rates based solely on the costs of the program would distort the ratemaking structure.

See BPI II, 146 Ill. 2d at 244. The evidence showed that ComEd historically has invested in capital

distribution improvements and recouped those costs through traditional ratemaking procedures, and

the system modernization program should be treated no differently. We conclude that the

Commission abused its discretion, and we reverse Rider SMP because it constitutes improper single-

issue ratemaking that is not justified by any special circumstances. See Finkl, 250 Ill. App. 3d at 327

(the Commission erred as a matter of law in allowing rider costs normally recovered through the usual

ratemaking procedure).

D. Rider 25: Nonresidential Space-heating Customers:

BOMA Appeal No. 1--08--3054

In 2006, the Commission allowed the termination of a provision known as Rider 25, and

BOMA appealed to this court. ComEd, 398 Ill. App. 3d at 522. Rider 25 had established a

preferential rate for certain nonresidential space-heating customers, including BOMA's members.

Instituted at a time when ComEd generated electricity, Rider 25 was created to encourage the use

of electricity during the off-peak, winter months to balance usage with the peak summer months when

air conditioning is widely used. The goal was for ComEd's power plants to operate at peak efficiency

throughout the year.

When the Commission eliminated Rider 25, the rates charged to BOMA members were

increased to match those paid by other customers. Pointing out that numerous building owners had

equipped their buildings with electric space heaters in reliance on Rider 25, BOMA argued that

paying the new rates would result in "rate shock" and that the alternative of replacing the current

-43-
Nos. 2--08--0959, 2--08--1037, 2--08--1137, 1--08--3008,
1--08--3030, 1--08--3054, 1--08--3313 cons.

heating systems with nonelectrical systems would be prohibitively expensive. ComEd, 398 Ill. App.

3d at 522.

We affirmed the Commission's decision to do away with Rider 25. ComEd, 398 Ill. App. 3d

at 527. We emphasized the undisputed evidence that, because ComEd no longer generates electricity,

ComEd's costs to deliver electricity are the same at all times during the year. The end-use

characteristics of ComEd's customers do not affect its costs of providing delivery service. ComEd,

398 Ill. App. 3d at 526.

In this rate case, BOMA proposed that the Commission reinstate Rider 25, thereby creating

a rate structure that differentiates between nonresidential customers depending on whether they use

electricity for space heating. ComEd responded that doing so would give space-heating customers

an unwarranted rate subsidy that would not reflect the cost of service.

The Commission approved rates that differentiate residential customer classes based on their

use of electric space heating. BOMA requested and was denied similar treatment for nonresidential

customers. The Commission rejected BOMA's proposal to establish a separate class or distribution

charge for nonresidential electric space-heating customers, finding that Rider 25 was not cost justified

and should not be reinstated. The Commission concluded as follows:

"ComEd no longer has generating capacity and Rider 25 has been eliminated. Supply

charges are not the subject of this proceeding. There is no evidence that delivery service

costs vary seasonally. The record shows that distribution facilities must be planned and built

to meet customers' maximum loads, regardless of when those may occur. There is no basis

in this record to conclude that it costs ComEd less to serve nonresidential customers who use

-44-
Nos. 2--08--0959, 2--08--1037, 2--08--1137, 1--08--3008,
1--08--3030, 1--08--3054, 1--08--3313 cons.

some of their electric service for space heating. Nor is there a public policy issue which

would justify a deviation from a cost causing allocation."

BOMA revisits Rider 25 in this appeal. BOMA argues that the Commission's order violates

the Act by increasing the rates ComEd charges to BOMA's nonresidential electric space-heating

members. First, BOMA argues that the change amounts to unreasonable discrimination between

classes of service. Second, BOMA argues that the change is not justified on the basis of cost. Third,

BOMA argues that the nonresidential space-heating customers are improperly subsidizing nonspace-

heating customers within the same customer class. Finally, BOMA contends that the Commission

failed to consider BOMA's substantial evidence to support these theories.

The Commission's evidentiary conclusion is prima facie true (see 220 ILCS 5/10--201(d)

(West 2006)), and we defer to its factual findings. To obtain a reversal of the Commission's findings

on this issue, BOMA must prove that the opposite conclusion is clearly evident. Continental Mobile

Telephone Co. v. Illinois Commerce Comm'n, 269 Ill. App. 3d 161, 171 (1994). For the following

reasons, we conclude that BOMA has failed to meet this burden.

1. Sufficiency of the Evidence

We first address BOMA's last issue: whether the Commission's rejection of Rider 25 is

supported by substantial evidence. The Commission placed nonresidential space-heating and

nonspace-heating customers in the same rate class based on the factual finding that there is no

evidence that it costs ComEd less to deliver electricity to nonresidential space-heating customers than

to nonresidential nonspace-heating customers.

Paul Crumrine, ComEd's then-director of regulatory strategies and services, testified regarding

the history and purpose of Rider 25, why it is no longer necessary, and how reinstating it would

-45-
Nos. 2--08--0959, 2--08--1037, 2--08--1137, 1--08--3008,
1--08--3030, 1--08--3054, 1--08--3313 cons.

create an unfair subsidy for BOMA's members. Crumrine stated that Rider 25 is a relic from the pre-

restructuring era when electricity came from generators owned by ComEd, when electricity supply

costs at those plants were significantly lower in the winter, and when both supply and delivery costs

were recovered under a single, "bundled" charge. Supply and delivery rates are now priced and

regulated separately, or "unbundled," and any seasonal differences in energy costs should be reflected

only in supply charges, not in the delivery rates set by the Commission in this case. He also opined

that space-heating customers' higher winter use does not affect their delivery costs. Distribution

facilities must be planned and built to meet customers' maximum use, regardless of the season in

which it occurs or whether that energy is being used for space heat or for some other purpose. As

a result, the costs of distribution service are not lower for nonresidential space-heating customers.

Crumrine concluded that, whatever sense Rider 25 might have made before deregulation, when

ComEd owned generation facilities and the costs of power production varied seasonally, Rider 25

is no longer justified by cost. Reinstating Rider 25 would, therefore, create an unjustified subsidy of

nonresidential space-heating customers. The Commission was free to base its factual finding on

Crumrine's testimony, the Commission's finding deserves deference, and we conclude that the decision

is supported by substantial evidence.

2. Discrimination Claim

Section 9--241 of the Act provides that no public utility shall, as to rates or other charges,

services, facilities, or any other respect, make or grant any preference or advantage to any

corporation or person or subject any corporation or person to any prejudice or disadvantage; and no

public utility shall establish or maintain any unreasonable difference as to rates or other charges,

-46-
Nos. 2--08--0959, 2--08--1037, 2--08--1137, 1--08--3008,
1--08--3030, 1--08--3054, 1--08--3313 cons.

services, facilities, or any other respect, either as between localities or as between classes of service.

220 ILCS 5/9--241 (West 2006).

BOMA argues that, by not differentiating the nonresidential customer classes based on space-

heating use, the Commission approves discriminatory treatment between rates and classes of

customers, in violation of section 9--241 of the Act. In support of this position, BOMA points to

evidence that, as to residential customers, it costs less to deliver electricity to space-heating customers

than to nonspace-heating customers. The difference in the delivery cost results in different rates for

the two classes of residential customers: the space-heating customers pay less than the nonspace-

heating customers. BOMA argues that Rider 25 is necessary to carry over the same rate differential

to nonresidential customers so that the space-heating customers pay less than the nonspace-heating

customers.

The Commission responds that BOMA did not demonstrate that residential and nonresidential

space-heating customers share characteristics that affect the cost of delivery. Simply because certain

residential and nonresidential customers may use some of their electricity for space heat does not

establish that the other uses by the two groups are sufficiently alike that the rate differential should

apply to both. The Commission emphasizes evidence that the facilities charge for a residential space-

heating customer is less than for a residential nonspace-heating customer, which creates two different

revenue requirements for ComEd. The difference in the revenue requirements for the two classes of

residential customers is rooted in the number of customers and their usage. The Commission stated

in its order that the record is devoid of evidence that it costs ComEd less to supply electricity to

nonresidential space-heating customers than to nonresidential nonspace-heating customers, and we

defer to that factual finding.

-47-
Nos. 2--08--0959, 2--08--1037, 2--08--1137, 1--08--3008,
1--08--3030, 1--08--3054, 1--08--3313 cons.

3. Cost Justification

BOMA argues that the rate increases for nonresidential space-heating customers are not

justified on the basis of cost. BOMA again cites the reduced cost to supply electricity to residential

space-heating customers as a reason for charging less to nonresidential space-heating customers,

including BOMA's members. BOMA states that it "submitted uncontroverted evidence that parallels

are apparent for the nonresidential customers, and nonresidential customers that heat with electric

spaceheat pay more for electricity on a per unit basis than customers that heat with some other fuel

source." However, BOMA's citation to the record for this proposition is not to evidence at all; it is

to the argument portion of a pleading, presented to the Commission, that a cost differential for the

two classes of nonresidential customers may be inferred from the data available for the two classes

of residential customers.

BOMA has never presented empirical data that the cost of delivering electricity to a

nonresidential customer varies based on the customer's use of some of that electricity for space heat.

Apparently, such data is available to show the cost differential for residential customers, and BOMA

does not assert that data for nonresidential customers cannot also be collected. Rather than focusing

on measurable delivery costs, BOMA relies on evidence that its nonresidential space-heating members

have incurred a steep increase in energy costs since the elimination of Rider 25. However, it is

undisputed that Rider 25 established a subsidy for BOMA's members such that the rates charged were

not based on the costs of delivery. Thus, the evidence of the rate increase is consistent with the

elimination of Rider 25, in that rates were brought in line with actual delivery costs. The rate increase

is not proof that the former treatment of nonresidential space-heating customers was based on the

costs of delivery and the current treatment is not.

-48-
Nos. 2--08--0959, 2--08--1037, 2--08--1137, 1--08--3008,
1--08--3030, 1--08--3054, 1--08--3313 cons.

The Commission asserts that the new rates are based on costs, and the Commission stated in

its order that delivery costs no longer vary seasonally. The record shows that delivery facilities must

be planned and built to meet customers' maximum loads whenever they occur, and there is no basis

to conclude that it costs ComEd less to deliver electricity to nonresidential customers if they use some

of the electricity for space heat. ComEd witnesses Alongi and Jones testified that there was

"absolutely no cost based justification" to set nonresidential distribution facilities charges as BOMA

had proposed. Thus, when the rates are the same for all nonresidential customers--regardless of

whether they use space heat--the rates are based on costs.

4. Subsidization Claim

BOMA also argues that the elimination of Rider 25 has resulted in nonresidential space-

heating customers improperly subsidizing other nonresidential customers who do not use space heat.

The Commission determined that it costs the same to deliver electricity to all nonresidential customers

and, therefore, the nonresidential customers all pay the same rate. The Commission heard substantial

evidence from which to draw this conclusion. The space-heating customers pay more for electricity

simply because they use more electricity than nonspace-heating customers. Therefore, there is no

improper subsidy. The Commission could rely on ComEd's testimony that, since ComEd no longer

generates electricity, there is no longer a reason to charge nonresidential space-heating customers less

than nonresidential nonspace-heating customers, and to do so would actually amount to an improper

subsidy in itself. Also, the Commission could rely on ComEd's testimony that it did not analyze

BOMA's proposed discount because it was based on an outdated cost of service study.

CONCLUSION

-49-
Nos. 2--08--0959, 2--08--1037, 2--08--1137, 1--08--3008,
1--08--3030, 1--08--3054, 1--08--3313 cons.

We hold that (1) the Commission heard substantial evidence to support excluding from the

operating costs 25% of the challenged labor costs for ComEd employees who worked on both utility-

delivery services and merger work; (2) the Commission abused its discretion in excluding from the

rate base the increase in accumulated depreciation of existing plant during the post-test-year period;

(3) the Commission abused its discretion in approving Rider SMP, because the rider amounts to

improper single-issue ratemaking; and (4) the Commission did not abuse its discretion in rejecting

Rider 25, because the rider was not cost justified and would have improperly subsidized

nonresidential customers who use space heat. We remand the cause for the Commission to revisit

the accumulated depreciation issue, including allowing ComEd to request recovery of the aggregate

cost of the third-quarter 2008 plant additions. We express no opinion as to whether the Commission

should include in the rate base those costs, but we note that ComEd has the burden of proof on

remand.

For the preceding reasons, the decision of the Commission is affirmed in part and reversed

in part, and the cause is remanded for further proceedings consistent with this opinion.

Affirmed in part and reversed in part; cause remanded.

HUTCHINSON and HUDSON, JJ., concur.

-50-