fully in need to liberations in the impressions conference that will be held in conjunction with this case after her election is over and i expect they'll be rather lengthy questions say given the multiple issues involved in this case a brilliant briefing on all sides and the issues that have been raised by the parties i have been front of me an order which i think everybody's agreed to which says that the attorney general gets the openness with nine minutes to the utilities then it will have seven minutes and they set out the issues they wish to address commerce commission will then have fifteen minutes to address all the years then a response in reply from the attorney general for eleven minutes and a response and reply from the utilities questions as a matter of fact i notice for example they do opening remark by the attorney general is devoted to the v b a issue you may be confronted with a question about your clear perhaps not as clear as it should be that the court that first gets the notice of appeal gets the case though it's true that the but it is this is a little bit of an unusual situation or yes because in the send by the commerce commission where has the means or to seek a supervisory order from the supreme court so that we don't have to do this all over again if you're wrong i would think that the ones who are challenging the reason well actually it's legal recent supreme court rules provide that the first court it gets it keeps it doesn't say anything about whether they can transfer it later as if their discretion anyway and it usually emphasize an issue important to the administration of justice which would seem to me again to implicate the supreme court rules with respect to first court gets it anyway you have this problem with vdare wasn't placed over the last six years prior to when it was implemented we did the calculations and the utilities would have it would have gotten two hundred forty two million dollars more in profits over that period of time than they actually got so based on historical record i think we can say that when the v b a is in place they will make more money over a twelve month period based on that six year analysis that is in the back of the next obvious question right well chris what's what's really partly and clear here is that you have your opening volley to say you didn't have any statutory authority even to do that that's correct how do we review that that we view here that on this on substantial ev but they have to follow their own role i know they've established a test year and when we're looking at a test year they can't just say except for this one very very important item of revenue how much gas people use were actually used the tester for that we're just going to measure that a month by month basis and that use the entire test your process because what we've got in the test year is we take a year and we said here's all your costs here's all your expenses here's all your revenues here's the amount of money that you're entitle that there's a reasonable rate of return for you  but those kind of alterations is is what we're aiming for we're trying to make the regulated process look like a competitive process we're trying to put them in a situation where they have to adjust to changes in the marketplace and you don't think the i c c has the policy power to right how much money of their cost they're making their forecasts are they're just in their per customer profits i don't monthly basis that's what they're doing that's how that's how you predict that's how i can hear the i c c grinding its teeth right now but go it's an illegal right or it's a right it's not authorized by law because it doesn't meet the criteria for for a legitimate writer and they don't have the authority to just make up new areas that they can impose writers on and sue because they there is that if if if we will lose money from people using less gas they will encourage people to use less gas but the way they're going about doing that is they basically discourage the actual consumer the people who are  ok that includes people who are being really frugal and people who are ignoring frugality people with high efficiency furnace says and people without right up subzero temperatures and all the smooth out the revenues per customer what you're ignoring is other efficiencies in other cost controls and the growth of new customers that the utilities out there out there doing so so you're maintaining you're basically insulating them from any changes in their revenues from their what you're saying is that we're giving them an opportunity coincidentally along the way to make a little more money well but what i'm saying is that the test you're sort of takes all those cost expenses into one place and says here's the reasonable rate of return that you get a in the fetter at the federal level and then it's passed through to the consumer as a writer because they don't control that cost it's just a fluctuating cost has nothing to do with anything they could or putting do to alter it so that's just passed through as a writer so the cost of heard it before and you're probably examining very carefully would have two primary functions first it would increase rates to account for my gin revenues those magic words again which the utilities would be an eagle to collect in a given month due to changes in customer us right involves no more than periodic it just looks to a rate that is fixed in approved by the commission and with such adjustment is determined by application of the set of mathematical formula it's the type of formulation and mechanism that the court indorsed in city one i e a rate schedule that contains provisions which effects the dollars and cents costs of the product sold they go back to a very old supreme court case for their authority to gas they're going to make less profit and we don't want that to happen that's really predatory one says it says we wish we just if people use less gas they can have less margin revenue which is less powerful and we have to avoid that and what we're saying is you don't have to avoid that if we're trying to simulate every returning to my critique really with what they're saying is that when consumers use less gas the utilities are going make less profit and we don't want that to happen and what we're saying is you should give them an opportunity through through the test your process to reach the revenue requirement to get a reasonable rate of return a reasonable profit but you should now that you do not have the authority to guarantee them a month by month returning their equity at exactly a certain level and allow them to cut costs elsewhere exceed that level by gaining new thing and doesn't doesn't the commission hand the power in shouldn't it have the power to do something about these anomalies stop off of a test year i do they have to wait until it's time for rate making  authority rather patterns weather is getting warmer so people are using less gas they used to use a thirty year thirty year weather prediction to to it to address how much gas can but he's they've reduced that now to a ten year plan because the weather is getting warmer so that they can predict with more accuracy what the winters any one people are going to excuse me they think the weather is getting they think they think the utilities think the weather is getting warmer and that's why people are using less gas that's one of the one of the points that their that precedence that you're suggesting this is the kind of change that should go to the general assembly that's correct and let me add one point the first down which is that if it is a substantial evidence review we still think we win and th get makes you hundred forty two million a half that revenue without projections over that same period that there was a disputed sale if those are undisputed facts why is it that they need this new revenue enhancement mechanism that's going to maintain their per customer profits on a month by month basis if they've been beating their overall profits without it so that's why i say substantial evidence in that support the commission's decision here thank you thank you we have more than one lawyer who's going to be arguing on this second study stallman to work with you when you do step up identify yourself for the record with the supreme court if they're not going to step in we've got it ok i did want to correct one thing i think the first inadvertently misspoke and i don't have the record on this part in front of me after the rick hearing was you proceed anyway you like that ok that's fine ok but thank you for the clarification with respect to the supervisory or guess again they are only a return equity issue yes the public utilities entitle to recovery of cloth it's reasonable operating costs as well as return on its investment and the combination of the two operating cost investment is what is known as the revenue requirement and it's the goal of utility rate making set rates at a level that allow the utility to recover its operating costs its revenue requirement and thereby earn its or authorized return on a year to year basis house will be addressing the b b a issue all right i i understand that the record was such that as the historical information the court has also record information of how he behaved as actually operated since it was adopted and i think that shows that the customers have actually benefited in terms of their basis point decisions it would seem to me from as i read the commission order they admit that this is really a depreciation everybody makes mistakes and if you stand on one hand you had the comparison that they wanted to do between these utilities and the proxy group of utilities that were used as the basis for determining equity and they wanted to compare the overall risk of these utilities a standalone basis compared to the product and the reason they do this in turn is because people's gas north shore along to a holding company integris energy group which owns both utilities and then utilities and the commissions theory was that because they were affiliated with nine utility entities which in general have greater risk than regulated entities that you can't compare directly these utilities well they're right about that are standalone in general yes i mean although it's not perfect you have some utility standalone utilities out there who are also affiliated with nine philip they're just not part of a holding company that is they don't have a corporate parent but they have some serious about filling so you can argue about i would agree that you should look at the comparison ok it can go either way and what is general now utilities are more risky than utilities so they want to make that comparison we don't challenge the concept and we don't challenge actually this particular adjustment it's how they went about it and how they want to know this is making this comparison of these utilities to the proxy they try to determine what utilities credit ratings would be absent affiliation with that regulate and they want to compare those credit ratings to the average credit rating of the proxy what's important for this appeal is that in developing those credit ratings for those implied or hypothetical credit ratings they started out with the assumption that the utilities this case with that assumption the imply credit ratings for the utilities looked better and then were higher than the average credit rating for the proxy and that resulted in the downward adjustment of warmer or colder would tend to reduce the company's threats but there are the risks being reduced here is the risk of noun recovery or under recovery of your revenue requirement well they've already made an adjustment based on the utilities financial strain based on an assumption of one hundred percent revenue requirement including necessarily the revenue requirement that is covered by wri and that's where the methodology oh maybe i should ask you what unfair question please we here will be be willing to give up the v b a you get your retirement investment wanted the way you want i would tend to think that because the writer i said it was an eye for yeah it is unfair but i can't because i can't answer it for the client i w i would suspect that over the long run you're better off with the d b a the terror change is more important from a policy perspective and a long run stability stuck than a few basis points  we adjustments for that writer to here as these accumulated adjustments add up it becomes a significant as they did in this case that the ten basis point one may not be particularly large it's about a million and a half dollars  utility lower your credit rating because you defaulted on a loan and then you're looking on the report and you see that there's an additional adjustment because you missed the payment last payment on that same loan other may be reasons to do that maybe it's you know an extra penalty that they want to put out but i would argue that the duplicative adjustment there results in a credit rating that is not sit substitute judgment for the commissions on the reasons for these adjustments but how they went about doing it the methodology and the key mistake they made the key to make mistake they made is if they're going to assume one hundred percent revenue requirement recovery for purposes of making the first adjustment then they can do additional adjustments for t a is putting you in a much better position then deserves to be considered yes it well if you're seventy five i think if they concluded that then they should have done the first understand where you're coming from but i you know what i also read their rationale for doing what they did and to a layman that it can occasionally make sense and again it's i mean do you think we're dealing here with some very sophisticated basically have to over all points of them have the numbers of points on them the idea from my perspective and i hope the course all the party reached i think identified the correct issue perhaps not the right words in it then words needs and  it is whether the commerce commission in a case where the total compensation paid to employees is prudent and reasonable can nonetheless apply a standard the i c c created if somewhere that compensation is incentive compensation she disallow it even if it's true not reasonable because it does not meet the customer benefit standard and you're not expected to the idea of a customer benefit standard in theory right i do object to the idea of a customer back stand because it hurts to admit it it hurts to shareholders or doesn't help the sure well there's a problem with the particular customer benefit unlawful unlawful and last that's what i wanted to know and you're you're right this benefits of the rate payer standard is unlawful it's something that the i c c is cooked up ha because it sounds good the application of the on my bell case right it expressly held one sixty six on my second i want twenty two don't like that was limited to that back situation i described and the court rejected the customer benefit stand that the stellar use were excessive the people involved work part time they had minimal contact with the day to day operations of the telly and their compensation was shown to be excessive compared to other utilities in the candlewick case which involved one officer he literally wasn't there residents in the area but each of these had a number of past difficulties including bankruptcy there were other employees who ran the day to day operations and in fact the president's duties were undocumented so but the second district it was took two cases well the compensation did not meet the prudent and reasonable standard and used that to support rejecting cruden ten reasonable employee compensation under the customer benefit standard we don't think that those cases support the conclusion that the second district bridge i'm going additionally point to the supreme court's case there for a case which approves a prudent and reasonable recovery of salaries as approved by the commerce commission run the distinction which is worthy of salmonella although it's not a legal point is that the second district noted that the commission had approved fifty percent of the utilities and signed compensation and that was part of the the the court's reasoning for why there had been an appropriate balance in this case the commerce commission approved about twenty five percent or flipping around disapproved about two thirds to three quarters of the inside of the session but in a completely different point is let's suppose the commission could adopt the customer benefits standard or a customer benefit standard the evidence is that there are seven benefits to customers over the incentive compensation in this case and the compare and it's not denied that those benefits exist bell the commission none the less said the customer benefit standard meant that the cost be disallowed so why are those seven benefits three of them are not cost related for our cost related the three that are not cost related are that these programs help attract a large enough workforce that they help to attract a trained workforce and they help to attract and motivate the workforce once you have no less opposed hypothetically i  benefits are ones that say customers money running is again within the total framework and like since the all the facts it's not country good the utilities determine the total computation employees and they determine how much what piece of that will be incentive compensation the incentive compensation comes with a slice of the pie out of the total compensation if you didn't have the incentive compensation in order to hit the same numbers to get the right work force you would pay more base salary and in fact the attorney general's office witnessed method i cross examination that if the employees had been paid the same amounts but it all been are decreasing hiring process decreasing training costs and finally the testimony mr whoever lancy that the programs in fact lead to the utilities having decrease cost they encourage that and the customers get the benefit of that because there is costly creases occurred in the period leading up to the test year and that reflected in the referee requirement sell in stock we do not believe  waffle to have the customer benefit standard if you are going to have a customer benefit stanley believe it is returning caprices to say that only some types of benefits count because there's no basis in the record for that saying only look at some types of americans and not others and finally if you're going to have one that talks about cost savings a dollar is the dollar is a dollar from a paraphrase of the public and if we and the commissions you say well if you save costs they if you have cost savings under a compensation program that's defined this way you get the money but if you have a cost savings resulting from a program that defined in a different way you don't that's like to move on to the pension issue if that's all right briefly and quickly all right briefly the second district opinion certainly is not against us and i like to think it is for us on this issue because an act case the commerce commission did not say the utility could not recover its pension contribution costs rather the commerce commission said the issue was what should be the correct rate of return on it that is what banks of the second district and they a the commerce commission concluding that there should be a rate of return although it would be lower than the general rate of return for these really hear the commerce commission said there should be no greater return so i don't really think that the second district opinion is is citizens supreme court decision in one thousand nine hundred eighty faded on pages twenty one twenty two and twenty three or three the argument was made that because of differences between rate making pounding an income tax accounting system as it over paid income taxes for years and therefore about four million dollars of the rate base of the of the utility the commission argued was just as argued today investors supplied funds because  too much frank in texas when that went at the supreme court the commerce mission with reversed that they could not say customers have been overpaying therefore somehow the customers paid for the asset instead of the utility there isn't any dispute that the pension trust or asset is owned by these filippi there isn't any speed about who writes the checks and in fact in the test year the tilley put in about sixteen million dollars and there isn't any dispute that that benefits not just the employees but it benefits customers the more money that is in the trust all else being equal the utilities have lower pension expense and that was illustrated in this case where an adjustment was made to reduce test your costs by almost two million dollars because there was this money in part because there was this money in the contributions have been made so this is unique you have an asset owned by the philippi paid for by the till that he and he feels he gets no return even though it benefits time down the middle he answered your question yes the only congress mission after the second district on its own motion transferred war and eventually by cases to this court the commission saw the super supreme court's supervisory order i from i can tell the courts from nine hundred seventy seven to the year two thousand my office in whatever capacity we were odd it whether they peeled back when the appeals went to the circuit court or to the appellate court we moved to dismiss whenever so that if you don't have anything other than a supervisory order well you don't ya think well you may say your honor we for many decades we were on the other side of this issue yes but we haven't we cannot since we can't explain what happened next case context right this is the way ok maybe right the second part of my bottom line is this this miss appeals to forty or fifty wanted to four fifty three and i hope i got the right numbers when they got to be numbered ok dr without restriction it should be  on or the out they want the party they had a partial rehearing granted or whatever and it's a number of cases if the bills things do not become effective then it really is just a mess and your special attorney general h dismissal of the first three appeals the three that were taken prior to their bussing back here what i'm going to do is give them an opportunity to respond to this hypothetical question i just put you and i should point out there was a least one case this is back when the itself when they try to determine whether any of their samples have something similar to a lighter b p a which stabilizes the return on revenue to the company they couldn't find it anywhere no one has submitted evidence on a point this is different matter the the it's c already test your payments of the pension plans these models were obtained from normal operating revenues collected from utility rate payers or represent funds supplied by rate payers under the only role for rate making purposes a public it's only may not receive return on repair supplied money the commission has for more than fifteen years consistently denied utilities when they've attempted to recover this and of course there was no evidence in this case that this money one district having jurisdiction to my way thinking that transfer to another district that also has appeals and i mean i don't think that i don't think it's just something that we actually have to think about incentive compensation regardless of whether or not it's it's based on earnings per share commission staff they said it's possible that if the goals of the plans are met they would get this incentive compensation so really up to them whether or not they might have say shanae then allows them to make their fight but public utilities aren't like normal companies they are granted monopolies by the general assembly they are granted monopolies to provide certain services in the services are those that are affected with a public interest like providing yes to people in the middle when and it's a different analysis and that's why the only supreme court has said that otherwise normal expenses do specifics of things that might help you attract talent to keep telling things like that unless there's a direct benefit shown to rate because you don't get to include those you're not saying you're unjust in a reasonable expenses then you don't have to find it it's not just numbers well it's probably very logical have that kind of a thing in a corporate setting but whether the rate payers have to pay for that for that incentive to increase company profits and earnings per s and reasonably expected to provide net benefits to rate payers that it's ok it doesn't find that the types of programs that are geared towards a recent company earnings per share have that nexus between providing benefits to whatever that that they're there recoverable will know certain unless they benefit ratepayers the supreme court has said if you don't get to recover those costs  what they're concentrating on is the can with case and the page case and saying that those two cases along don't justify what the court said but the court made only passing reference to those cases and noted that sometimes you can apportion plus just because there are costs you don't have to include all of them the rates not all of the activities of of officers maybe oh tell you both to rate payers and so but what it really concentrate on was the only  but it but isn't the incentive compensation to lower or to raise earnings per share that causes them to have this work force an example i've used before is if i go which i can't do into people's gas and say i'd like to work for you if you have an incentive compensation plan they say well yes we do i said is it based on earnings per share they say no we can't do that for get my if there's any sense of compensation plan if you don't need to have earnings per share it's not a necessary thing and it doesn't necessarily benefit of the ram to lower the first book and so they are the ones that appropriately would be subject to this particular  o nine to forty nine to forty one on the public utility saying no public utility shall s to rates or other charges services facilities or in any other respect make or  grant any preference or advantage to any corporation or person or subject or subject to the corporation or person any prejudice against and there can be no on reasonable difference in comes up you know i think you mentioned maybe once in the entire survey that this is a pilot program you could terminate it tomorrow i think well we commissioned the commission can always go back and revisit it raiders it's been going on now actually you know drum up people started educating saying they should lower their rates or their rates it's not that simple that's just one aspect of the red line ok that's not happening here all they're doing functioning quite well for the last seven of the eight years what was the need for this e p a something that had never been done before in illinois when the utility companies had been meeting seventy eight years utilities have pretty much been doing fairly well in terms of being getting what they want to the far as their returns because they want to take away the disincentive for them selves just because society in general is moving towards conservation that wasn't necessarily the same motivation it was going to die in the period they may have been making their rates of return during the period that they came in for a case because they want to ask for it overall  this isn't new this is a new wrinkle in the right ok that that kind of a wrinkle on the writer is so policy played that it out of the general assembly before it comes to the commerce commission  slice of it and we're going to make sure you recover that revenue now whether that revenue is enough to cover your costs that's not that's out is the attorney general accurate in the amount of money he says you're going to heat get is a result of this the project good afternoon your honor image house and i'm here on behalf of the you told us please the court first i'd like to see about three minutes of my time to my colleagues that have spoken concerning the presentation as well as of the information that you refuse first i'd like to speak to the whole issue of what you may view as or you have intimated might be a problem with the differences in the rates between just request one and two of the larger industrial customers the way that a utility rates a structure every rate classification actually represents a different way of treating as well as large customer buys faces that are stablished basically to recognize differences in the way that those customers do business with the utility small customers are obviously captive customers usually who have very few ways as well as small commercial customers who actually have the ability to participate in the geo fishers of programs under the that the utilities right or e p a which was approved as part of the st rape case where they're able own meetings of big able to buy energy efficient more energy efficient equipment or in fact switch fuels from natural gas to some of the fuel so that there are just ways in which customers use energy in a different way to justify their different now you've made that very clear in your period with respect to the power of the commerce commission to the effect that that is one of the quotes i noticed now was this that rate design decision making at such a cases that we have is that they have never really came up was there trying to specific requirements on the i c c i mean they've given them broad discretion but the question becomes when you have something something totally different compared to looking right at the that the rates the rate for each month might be adjusted from time to time that's happens all the time with you totally of rates it happens with the natural gas rates of people's gas and north shore because tracker or a rider that every month includes the actual cost of gas that the utensil utilities inter however because of contractual matters and other adjustments and in fact what right if he is is nothing more than the commission established a base rate the revenue requirement of the utilities and that revenue requirement is collected in the course of a year the commission has decided that it doesn't want the kind of fluctuations that occurred in the past where the utility would be able to collect more money when it was called for less money when it was  was a thousand dollars let's say for flat rate schedule what the commission is now saying that we will only allow you utilities to collect a thousand dollars over the course of the year to reflect your recovery a fixed cost no more are no less what happened in the past was that utilities were allowed to recover a portion of their fixed cost through based upon usage what are you going to do with the policy argument that sound back at you if we take this b p a at face value and what it's done is that my energy conservation your energy conservation is never going to be rewarded with less the price of gas has gone up thirty percent gallon to cover the fact that the gas retailers who are selling me the gas aren't selling as much gas so in order to cover their costs they have to raise the price per gallon because there  people would argue they should be true but in the case of your prius remains the same you continue to have to make that payment to the bank or whomever find this your car they have the same level no matter what the price of getting your fix i support your work recover through a fixed customer charters fifteen dollars a month two dollars a month and another portion were recovered through the distribution charge which went up and down depending upon how much gas you write so that by that so that that was ok so long as weather remain fairly normal and customer usage remained fairly six as it were as was demonstrated by mr ford who employ submitted testimony as well for the utilities to continue to recover their costs because changing weather patterns meant  issue i would like an opportunity for replying to the v a issue and i will leave a stab at all of the issues on which i may have to leave which would be the incentive compensation the pension i think they've been they've been argued at that me by the other party before you get to that what about this question of and that should take care of that issue thank you at least we'll know why they remain silent or maybe we won't i'm not sure that they at least will have the benefit of your arguments with respect to that we may have erroneous that believe that the just what the revenue requirement would be and they said girlfriends and reach your revenue requirement go ahead and run your business to meet the revenue requirement but now they've taken one thing out of the task here going forward and they've said no we're not going to use those test your numbers we're going to follow those actuals but they hadn't taken any of the other numbers from the test year out of all past year they haven't taken the actuals of the cost so what they've done is they've guaranteed the actual revenues by not moderating it at a monthly for that's why their distaste for it may be disfavored but i don't think they're going to go away anytime soon but they should be limited they should be limited to to those those costs that come up after the task year that are it's it's your actual profit that's how you make your money is by having a customer use your product so so to take your customers use and say we're going to keep that state we're going to give you exactly the amount of revenue that you want even if customers don't use analogy that this is nothing more than somebody if we were regulating gas station retail gas prices then yes gas prices all right as gas usage went compete with each other they would have to and so they try to keep their prices as low as possible in order to get the business maybe in a competitive environment but rather v b a bez is that says there's no competitive battery no matter how much gas gets use we're still going to give you this amount of revenue plus whatever efficiencies you can find whatever you know lower cost you can fight to get that to whatever new customers you can find you'll get revenues from that also so  it's no more or less than the one thousand dollars revenue requirement we don't agree with that it's at least the one thousand dollars revenue requirement and any dish the customers you get go up and beyond the one thousand dollars revenue requirement i see your point shaking your head but that's emphasize my opening argument that's not we're talking about here with how much how they did it and the evidence of the error is what the commission itself says a bit how it went about making these adjustments and once you risk second the sixty basis points that's in the record as the recommendation from cub and other purdy's i'm a bit surprised the commission is pointing that out because the the commission agreed with utilities that that was based on a discredited theory oranges commission found rejected the sixty basis when adjustment saying that they found the utilities criticisms compelling coun executives here for example more than half a million dollars under the team incentive award plan is for non officers so just just in case there's any question that right on the pension mr kelleher made a point which is just as a false promise which is if you don't get a new capital infusion like comair did for the pension plan that means all the money in the till he has isn't capital it all came from customers if that it on the pension asset which benefits customers and they are being told they will get no return on that why would they ever put any more money in it's the detriment of customers this decision as well as bailout thank you constance i want to thank you all initially for the very professional way you've all conducted yourself today and i also want to commend you all on the quality of your briefing it was superb as complex as this issue is the denigrating the opponent and that's very useful to the court when we have the benefit of such superb counsel on all sides of the issue as i indicated earlier i justice joseph gordon is the third member of this panel he will participate fully in the deliberations on the impressions that we have in the discussions that we have leading up to a resolution of this case the case will be taken under advisement and we thank you all again