i'm all of the remaining particularly definitions of terms and some instruction on the accounting dynamic as to how it appears in the base  of that sort which can be very useful for the three of us and hopefully for you says i'm assistant attorney general and i represent the people of the state of illinois and the people who are appealing the infrastructure costs covering a writer which allows people's gas to pass through to employed i don't say that i don't know preempt is the right word but the second district addressed this exact issue which is when can you if you can use a rider to recover infrastructure investments and the second district in the comment case said said that you could now because infrastructure investments quote are quote the type of cost that should be recovered through traditional rate making procedures and it's a very real risk opinion i mean not now tell us how  infrastructure cost would be computed into ordinary day base rate making procedures having to do with my special request it shatter of ordinary rate making procedures are com basically of establishing what's called the revenue requirement which is the total amount of money that that utility expands all of its costs and expenses while it's profit at those two things together and what you have something called the revenue requirement which is the amount of money that you clearly that rates are set to recoup for the utilities so if your revenue requirement is say one million dollars over the course of the year one year which is all your cost expenses plus your profit take round number of one million then the rates are sat so that the utility if they run their manage their business viciously will recoup one million dollars from supers at the end of the year how does that dome of facilitate the ultimate conclusion by the commission has to the amount of your return which should be resupplied risk that that's correct and how this risk get reflected in that particular  is reflected in the rate of return so so it is for additional risk i know it's reflected in the rain every time but how does the infrastructure repair figure as a risk since basically voluntary since it's not doesn't meet the second district standard of being one expected and out of the control of the company well that's correct so the way the way that it's incorporated into the revenue requirement is that the the core calculation of the revenue requirement is called rate base which is essentially capital investments which is the amount of money and the utilities principal function is to maintain its its  make sure the they're operating so its principal expenses are capital expenditures so that the main the component of that revenue requirement is the amount of money invested in its capital so the revenue requirement it corroborate the capital expenditures because it is it is the principle or miles that goes into the revenue requirement so what utility does they pick a task here any twelve month period that they want and then they show the commission how much they've invested in rationale for requiring that it go through ordinary really base rate making procedures as opposed to being specially refunded single issue other than s to walk its character but how does that figure into the rationale even if it's only expected by the end of the year you know well what the second district what the second district's rationale said with respect to infrastructure is that when you invest in infrastructure when you make infrastructure improvements there's going to be some are setting savings somewhere within your company if you up if you would for example with this particular  characteristics that would be required under the second district satisfy the need for the writer as opposed to the characteristics that are agency or state backed up franchise fees or fake chesty or a tax for the cost of gas that you truly have no control over and they're just passing that through to the consumers so there's no offsetting change in their operating expenses or their capital consumer without any change or savings to any other aspect of the utilities business and infrastructure and business investment like this update and maybe replacement is going to lead to savings in the operating expenses and those savings in less you cooperate all of this into the revenue requirement a lot of those savings are going to be lost to consumers so that's why infrastructure and operating expenses the case finkle dealt with operating expenses the comment case health infrastructure those are the core components of the revenue requirement and you lose the are saying that dynamic nature of how they impact other if you take one out and you and you make a rate based on that single issue that's what singlish rate making is you take that out of the revenue requirement and then you lose dead you you can't keep here that that's exactly right and when you use the revenue requirement right happens is they set the revenue requirement that one number at the end then that the company has to run their business and they can make more money if they run it more efficiently rates of their so the satisfy noticeably and now their incentive is to spend as much as possible and that single item and raise their revenue because they're getting a rate of return on that single item and to reduce the sales rep because they're going to get to keep that and that not right that he passed along so well you know that  are involved in rate making even if it doesn't involve a mitigation or recovery or savings through the actual service performed a for which the writers who work so you can the charges that have passed through but still wash the company necessarily recover the pass through if it's going to have a fantastic year in other areas that will still quickly cutting down the weight that you would argue naturally have to endure during the rate making process things like that whether the the cost is imposed from without whether it passes through is second but what that because there may be other reasons to facilitate requiring that expands to the company for work political social consumer oriented reasons what you're referring to those incentives that you're talking about have  rules the fundamental principle is we're not going to bill consumers that way we don't think it's accurate it requires too much central planning it requires us to monitor every expense along the way for to lot of what we're going to do instead and most commissions work this way is we're going to put all the expenses into that one test your pile where are they ended nature of business can work itself out offsetting savings can come from from offsetting investments and then we're going to see where that number is at the back end and we're going to set rates and we're going to let utility run its business within those phrases those are too low they can come back in for a rate case and we can look at it again but if we start to say that well we say that's not the only way to separate us and absolutely it's not the only way to separate you could do you're the sort of  corroded or whatever or pose a possible danger and it is totally in the hands of the of the utility asked to when and how far to go plan for recovering the infrastructure by twenty fifty which is safe and reasonable and to quote them there's not one iota of evidence in the record that the programs the media that celebration is necessary to prevent or eliminate a public safety concern so they're saying their now rather than well if it in that in a head pathetic a situation where there was an absolute immediate safety concern and the utility came forward with evidence that they were unable to borrow the money in the capital markets to address the a concern i don't know that would come forward and say oh the second district decision absolutely foreclosed as a writer and we've got that something rob i wouldn't say they're probably happily we don't have that case we're not one iota of evidence that there is a safety concern ignoring the tester role it's taking rate base the core component of the of the revenue requirement it's moving it out to the side it's letting them recover it separately and there is it and that is single issue rate making just as the second district set so  of a whole range all financial dynamics occurring in the top and he approached this is only one you can still happen a situation where it may not be necessary to is a single issue rate making because you're passing it through and it's a single issue but with the second district set is with these these posts of pastors if they have these two particular conditions that attach to them the risk is minimal the risk when you have a tax that doesn't interact with drought rates as it doesn't interact with your capital investment the risk of passing that through is minimal so there happens is in a real lesson to ation is you have a rate in place and the city of chicago then decides to tax the telly so now there's an additional cost to should they go back in for a new rate case because they've just been hit with a new tax or can they pass that through as a writer it's just the pastor's out of their control that it was unanticipated it doesn't alter any of the factors that went into their into consideration not only the cost of that and also the benefits to them for that's exactly right and if there is if they want to accelerate it in the future they can use a future test year they're allowed to do that or to say the next twelve months we're going to accelerate name replacement you know we going well replace two hundred miles made in the next twelve months we think it's prudent it's reasonable we want our brains to refract that celebrated a replacement but it would all were flat what those savings would be a nephew to hear and that would all go into the revenue requirement so th infrastructure is inherently has to be part of the revenue requirement it can't be recovered separately for riders it here without completely undermining its antithetical to the tester that completely undermining that revenue requirement as a whole you know i think that through through your questioning i think i've covered everything that was on the way out like i'd like sit down now a writers you'll see that there's been doesn't a situation what if it's something like the inflationary cost of natural gas we're writing the appropriate for the head of the why they did not submit sufficient evidence that actual evidence that the commission outlined and have a road map as to what they would need to see to evaluate whether it's a property for a ride so they told me or no every come unknown then and so when the decision was made it would be useful to the utility to celebrate their previous land for replication  writer was sort of acceleration aside at that point it was determined state of the art mail says was that while yes there's no current concern that this is going to have an accident tomorrow with her is some concern in the aging nature of this type in studies in terms of how this could fail that acceleration would be a good thing now only because it removes the risk those types propose but because a modern system has additional safety features over and above the removal briefly you know the writer was a factor as through savings that are generated in the operating costs it's supposed to be as we had last no less than every three years to make sure it's updated as well was a every year the cost cas being replaced to zero environmental mess is voluntary it really needs to be done based on objective outside along with a reasonable return on its investment in some of those two things is the utilities revenue requirement and the goal of utility rate making is to allow the utility rates that in turn allow it to recover revenue requirement and or its return you know nothing more nothing less for the utilities return kluges a percentage rate of return on the equity that's contained in its capital structure capital structure typically has a portion of equity which is investment versus debt which it goes to other curteous what happens when you have infrastructure replacements t up to the new construction on how does that figure into the of value of the equity and is that considered investor provided our in infrastructure would add to what's called the rate based utilities investment dollars invested in that system and to that they earn a return and then that set by the commission here in two thousand and nine  they set people's gas are we at ten point three percent or sure at ten point three three percent so that's what they would earn on the equity portion of the rate base which would include the cost of forecasted investments costs utilities risk associated with that investment is lower and the rate of return associated with those i see are allergist that is reduced spines but that's a very small well  compared to the ten point x percent reduction is one hundred sixty two basis points that took it down to you know the i guess the mid eight high aids you think you're getting down close to that that cost range there so the utilit and looking at it from a financial standpoint it's not making a great margin over the past that that point in any of that one could i just one could argue whether the deduction was enough but it was considered it was absolutely considered and taken into account absolutely now getting back to determining the are we it's not a number you can simply calculate the commission as long relied on financial models  that use proxy groups of utilities that are similar to the utility for it to develop a market cost of equity and then the  adjustments combined reduced people's gases ari by fifty basis points and or stores by forty basis points and we challenge both of those adjustments without looking to the return of equity as being the priest down in the hands of a factor in value when you know i suppose here you can because the tied to the rate base the investment however the until it is only sale warm winter yes ah the rates will increase and make sure that the investors get their rate of return so now is based on the proxy group in this particular case that's totally artificial ben and that's so here we are going to let me finish the commission looked at things like  either extra recovery if the weather is warm or requires refunds of the weather is colder than that spec that those do affect the cost of equity of that proxy in this case the commission looked at that and actually cost of gas that it sells to its customers but in terms of cost of its own employees costs on systems those costs remain under its control and how it does managing those cross affect what  now are challenges to the financial risk adjusted we we have to some complaints about how the commission as i say tilt the scales against the utilities and making that adjustment first ignoring evidence that show that says the commission agency among other things offers an explanation for its decision which runs counter to the evidence before the agency or were just so implausible that it could not be ascribed to a difference in view or the product of agency summarize the second issue with the financial risk adjustment and apple storage or just comparison to determine the the financial risk differential between the price a group in the attila days they compared what the utilities credit ratings would be if they recover one hundred percent of their two thousand and nine revenue requirements a hypothetical ideal situation against what the a proxy proves actual average credit rating was based on actual financial performance again we see that as a claim that apples and oranges comparison especially so if you consider utilities recent financial performance which was anything but ideal i think as you mentioned justice warden the utilities had at significantly under earned their returns in recent years so the idea that we can safely assume that set of about this is that the result of ultimately imperfect means of the evaluation to the extent that you look to  basically at best a kind of loss and whether it's there's of a methodology that with more more area of inquiry but the methodology that the commission used here resulted in an unfair comparison between the utilities and the proxy group one that that  because it reduces the return on equity for illogical and unfair around unfair non factual reasons the second adjustments that we challenge are the reduction of utilities are  would conceive that they would those would have the effect of reducing the utilities risk however in this case these adjustments counted compasses suited double counting of that risk reduction because the financial risk adjustment that the commission had already made already assume that the utilities with earn one hundred percent of the two thousand and seven hundred s and if you assume that then no writer would have any irrelevant which well that if you if you assume that though and then adjust the hour a week based on that assumption to that point to reduce the hourly down to a point where you're assuming full recovery there's no further an entire new rate case we all know that would be within their discretion yes sure absolutely you know we're just asking them to get it right and to do it the way they can make everybody always asks then our position is that you must reverse right or adjustment as duplicative if you were to reverse the financial risk adjustment we would concede that the writer adjustment should stay certainly could be incentive compensation issue understanding the flow of some of the discussion i'd like to sort of drop in a sense of the to the bottom line so let's say although it is not our legal position that the i c c actually had the that own standard the must be true and the commission and having adopted a customer benefit standard can't then say we're going to close our eyes to certain custard and if it's a pretend they don't exist or w when there's nothing in the evidence for a record a logic that supports all that we may want to look to see how directly or indirectly it becomes right so let's let's stick with one of them you know others one of the st permeating the commissions standard seems to be the notion that somehow the shelters are second class in this equation but that isn't the argument trying to make them trying to get to one of the benefits which directly benefit the customers and you don't even see it that total is set based on what screwed it reasonable for the market and no one no one has disputed that in this case batt means that when they were setting the total compensation and they said this amount is the total it's going to be the targeted incentive pay amount that meant that everything else was less by that same amount of dollars they didn't set base pay and then have a separate decision where they said health insurance benefits  separate decision but they said instead of pay they said a total and so when you have the incentive compensation it trades off with the other elements of the compensation so an extra figure to speaking ten dollars an incentive compensation them wage rate totals and wouldn't the union be the one who might have a better voice on this than manage that they could be but again your honor there is no evidence and isn't billion in favor they are but there is no evidence this is a perk there is no commission finding it's a perk there's nothing from the commission at all in its own order that suggests this is somehow extra money it's the kind of bonus because that isn't what the record supports in the commission didn't think couldn't find contrary to what the evidence is which is the total is set and so these amounts trade off within that  find a rationale for that in the commission's order in addition why would one want to reduce seven million dollars of other compensation package it as an incentive a million dollars if that was for not executives it was for regular employees so substantially more than half of it is for regular employees the plants in this case are all you know stock options for the c e o or something we're talking about the regular employees here them and it's hard for me to see how when the vast majority in the case of north shore it something like two thirds of the cost are disallowed again or not for executive powers someone could find that somehow that was to look for  issue again no one not even the orders suggested to much was paid this is not like the to page case which is cited in the briefs or the candlewick cases which cited in the briefs of the second district the light on where you had people who didn't show up for your president who didn't show up until you didn't show up for work you had people who were off doing something else if they were still being paid as if they worked the chile where they were being paid more than their peers you know if we had those kind of issues yes  have this allowances here but again it isn't contested that when utility is a whore paying out for the incentive compensation is true then reasonable being mindful of the time based on net income and the i c c is brief and appeal all suggest or some plays are motivated because heard about it income they might just worry about the revenue side but as you say we're focused on the cost side too your honor net income just a trade off those two things so it isn't logical to think if we're trying to improve the bottom line we're only going to look at this half of the given incentive that also applied to the cost side and he says where the from a prior case you know with one of the metrics for example is reducing the number of these ghastly that's a that's a metric and there's different targets for each metric and a piece of this is that some of the plants had shoe layers they had a net income metric and then if that was satisfied then there were metrics that meet that everyone agrees the metrics beneath that i think meet the commission's standards or at least to date they've lister any other questions about the same compensation so there's two kind of post employment benefits unfortunately for me they only fall into buckets one is the pension which is accounted for separately shows up in financial statements separately pension plans and then thankfully for me so it's simpler there's what they call opeth which is everything else it's all the other poster point benefit of p b s so i'll let the commission pay them such that there's a liability on your balance sheet we're going to talk to docs that from your rate case because that's an investment you didn't make that that you know so we're going to dock that you won't get a return on that what part of their mission could arguably be long in the rate oh well if it's a positive number we would say all of it is because and now i'll say some facts that aren't  hostility you will see the pension expenses and the opeth expenses those give you a positive number or a negative number in any given year on the balance sheet you will see his balance sheet items for the opet which among other things house reduced pension expense that there's game time it usually doesn't get any return on that so in in people's case there's about ninety one hundred fifty five million gross ninety eight six million net on their balance sheet they own it they made the contributions they literally you know wrote the checks that bought the ads that are in the plan well but they  heaven with the money is regulated legally and in accounting space they put it that way they are the owner of that pension trust you'll find it on their mr pearce there's no facts on that that is a matter of theory or faith or something i don't know what it is because it's not tracing money it's not looking through the balance sheets  we do have two arguments for why it's not just wrong on the record because i've heard a lot thank you i didn't say we disagree with that either recovery of lobbying expenses it district allowed coverage of dues and civic for civic organizations and things like that those are perfectly ordinary expenses in a normal corporation  something like that nothing stops the utilities here from hearing their incentive compensation plans to be recoverable according to the standards of the commission but they've profit well it's and it's unclear what they're doing there are they they have several use of metrics again regarding that income you know and so part of that might be or could be considered lower  which is a direct benefit to readers but we don't know what portion of that it is and so the commission is has developed a standard over here where you have to come up with some tangible benefit maybe it's improving service maybe it's  have to look to see whether these costs are optional measured against the services supply in other words does the company have a choice in not undergoing this expenditure without compromising it's still it's it's up a service to the right i think that's exactly the point no one no one is complaining about them getting certain of incentive compensation it's what they're incenting employees to do it's not clear what they are now but in terms of measuring what they're doing if if choice the company could totally survive without undergoing that expense without it in the in the least bit hurried the rate there then in that case  service to the same with the same quality in the same extent with without it then it becomes something at least that remote flash i would think ought to be considered a customer basically i did the chilis here want to be treated like normal corporations who can in center place anyway they want but they're not normal corporations they're public utilities they're their clothes in the public interest or they provide a public service t provide gas in the middle of winter the public has an interest in things and that's why over time the standards have developed that if you're point and sent your employees with senate compensation you should have a tangible not a and intangible  the rider and the question really is is the argument going on the question is really in my mind whether or not the current regulatory set up is nimble enough to provide for the commission to enter an order which which allows an incense utilities to be able to do something they might not necessarily do but which as stated benefits appear in the record environmental bit safety benefits cost  rider you have a true of you know that they commonly have reconciliation provisions and that's because the nature of the commission's inquiry is different in the two types of cases in rate case the commission looks takes a rates it would look to see what the company actually earned and if it earned more than a certain level rate of return there was going to refight and the second district said you can't do that that's retroactive rate and so the commission obviously thought that was a good deal for a players and but the second district said no you can't so i don't know that there's a specific rationale that justifies floyd expect rakers if the utility has some some homemade of stake commerce commission and i'm taking up the return on equity and pension asset issues i want to begin first since according asked this question you begin with the rhetoric requirement formula that the supreme court and many other court has said that you get revenue acquiremen costs issue the incentive compensation the pension assets which is in the best they're looking to receive and the return on investment the cap the cost in common equity goes to determination what return on investment should be these companies have a relatively simple capital structure is only two components equity and debt the commission determines the debt by looking at the companies what they actually are doing a long term that three million dollars seven percent of billion dollars two percent and various analyses upon which return a comic is is the term you have these kept them studies in d c fs studies and they they all be and then by looking at other utilities that are publicly traded and try to determine but basically analytic much analytic models provide a guide but the matter at hand is not to be resolved by a panel of experts or by particular witnesses a proposal is a sound a reasonable judgement the commission in which the term ends a reasonable rate of return to common equity utilities argues no evidence in support of what the commission did in the commission brief we cite to the testimony of staff witness mcnally who whose evidence the commission it adopted for these changes the this lessening of risk these companies face because of these writers and they point out that mr mcmahon and his holy sweetness head fundamental disagreements over many issues involving this the issue was a question of fact what the commission to determine the the pension assets created because there's more money in the pension asset than they need to expense this has not actually they had a very good explanation in their brief about the changes in the actuarial ten cents but i know this my investment you don't get a recovery when it comes to investments you relate to the source of where the money's come from it doesn't grow to be operating special whether it benefits the customers or anything else  pension clearly traceable from the investors and commission are all a recovery away at oddly enough was treated as debt because it turned out the only company actually had raised debts to raise the money amp but so was little cheaper than recognizes common equity but anyway if you can show all day at the commission were granted you don't show it the money is there because it's repair money that you put in and they don't get a right to charge the rate payers for every turn  for coming up with the are we making adjustments to the are we that meth it's got to be reasonable and in design it's got to be logical and it's got to be applied with facts if we don't hold them to that at least then i don't know what the limit to their discretion yes  incentive compensation benefits customers because it trades off against other employee compensation and if the total they get put into rates on the pension i think i did not finish an answer to just so what the customers pay for in rates is the annual accrual amount what's that it's how much pension obligation the company accrued during the test year the pension asset is prepaid pension expense it is putting money away to pay future pension expenses and like all money it has a time value so the utility has put away money to pay pension expense in the future and if the utility to put away that money it is recovering in no time value of that money and one aspect of the bottom line here  yet when the pension expense amount is calculated that's put into rates there is a credit for how much has been gained so utility that the amount of the gain that you're talking about gets passed on to the customers to it sounds like what you're looking for is interest it is often especially when we talked about yesterday we're not asking for the money back you know so when you invest in plant you time value of their having repaid the pension expense of time and the same as a yes and if they don't get that then one aspect of this is they would be nuts to put in any more than because they are sorry if you can think of it as in a sense saving for right rainy day you know you're going to have to pay the passionate spent someday when you have the ability and they certainly don't do it every year but from time to time they make contributions that knowing they're going to have to pay it someday so do they have a reason yes that reason i just described and there is some gain on the investments leeson economy's doing ok but this is also make it a better investment for people who are trying to attract the shareholders savior that we don't have on the pension liabilities a certain percentage i mean isn't there some other ancillary benefit to  for riders in any circumstance to the general assembly thinks writers make sense and i would point out in rebuttal to that point about how many writers are out there that there are no infrastructure writers that in any illinois rates any utility there's no such thing as an infrastructure right or the first attempt at one was the one in combat right or s n p that the second district struck down this is the second attempt at one and there's a good point there's a good reason for this is mr read this when he said in his presentation of two thirds of the rate base for the utilities capital investment so if you were to take capital investment and move it to a writer you've taken two thirds of the session of the revenue requirement revenue requirements out rate expenses plus rate base plus rate of return so you've taken the huge the pool all of the revenue requirement you moved out of the test your process and you've moved it to a writer and essentially that's what we're talking about doing here with writer i see  expenses for a defined period of time putting it all into the pot coming up with the revenue requirement and when you take a piece out of that you file a protest your rule and that single issue rate making i understand there's another type of violation of the test y role which is to take things from different hears and combine them into a single rate making you know into a single rate that also violates the test you will that's now what i'm referring to i heard mr carroll her talk about industry calories and the way they've attempted to do that here is through the savings factor they're going to allow that allowed the utility to take their capital investments recovered through writer but then they're going to examine all the savings that come from that right or they're every three years that looks at what the savings is from this particular rider and we think that that approach is is antithetical to the way rates should be sad and it doesn't sound the problem it just compounds it because it replaces the past year process with kind of a day that was more of a central planning process where where instead of the utility deciding how to run their their investment their plan two thirds of their rate base the commission has come in and said we think you should accelerate the investments in year in your plant in your infrastructure which is what you tell us what so we're going to step in there or say here is here some incentives to do something that you don't necessarily want to do but here's an incentive to do it in our benette we're go stay and you're going to watch that for the next three years we're going to see where the savings are so you have a much more interactive process between the regulator and the company that is necessary and that has ever been used before it  creates improper incentives which we talked about which i mentioned earlier for the utility to spend more on the infrastructure on the right or this over or all of it it undermines the comprehensive test you're processed and it's impossible to be as accurate using this kind of a central planning method where we go back in every three years and try to assess the savings then the traditional rate making structure which inherently takes into account the dynamic interaction between