Rule 23 order filed	NO.  5-02-0065

April 1, 2003;

Motion to publish granted	IN THE

May 9, 2003.

	APPELLATE COURT OF ILLINOIS

	FIFTH DISTRICT

______________________________________________________________________

_____

ILLINOIS POWER COMPANY,			)  Petition for the Review of

							)  an Order of the Illinois

	Petitioner,					)  Commerce Commission.   

							) 

v.							)  No. 00-0714

							)

THE ILLINOIS COMMERCE COMMISSION 	)

and THE PEOPLE OF THE STATE OF		)

ILLINOIS,						)

							)

	Respondents.				)

______________________________________________________________________

_____

	JUSTICE MAAG delivered the opinion of the court:

	Illinois Power Company (Illinois Power), the petitioner, seeks the review of an order

that the Illinois Commerce Commission (Commission), the respondent, issued on November

27, 2001, finding that Illinois Power was imprudent in retiring its Freeburg, Illinois, propane

plant.  As a result of this finding, the Commission determined that the costs that Illinois

Power incurred to obtain pipeline transportation capacity of the propane plant cannot be

recovered from its customers.  Illinois Power appeals.  We reverse.

	Pursuant to the Public Utilities Act (Act) (220 ILCS 5/1-101 et seq. (West 2000)), Illinois Power is statutorily required to reconcile revenues collected under its purchased-gas

adjustment tariff with the actual cost of gas supplies prudently purchased for the 12 months

ended December 31, 2000 (reconciliation period).  The tariff clause provides for increases

or decreases of the rates or charges of a public utility such as Illinois Power based on

changes in Illinois Power's cost of purchased gas.  220 ILCS 5/9-220 (West 2000).  Although the tariff clauses allow for automatic changes in rates without prior Commission

approval, the General Assembly requires that the Commission initiate annual hearings to

determine whether the clauses reflect the "costs of fuel, gas, power, or coal transportation

purchased to determine whether such purchases were prudent."  220 ILCS 5/9-220(a) (West

2000).  In each proceeding, the burden of proof is on the utility to establish the prudence of

its fuel, power, gas, or coal transportation purchases and costs.  The standard under which

the Commission assesses the prudence of a utility's gas purchases, pursuant to section 9-220

of the Act, is as follows: "Prudence is that standard of care which a reasonable person would

be expected to exercise under the same circumstances encountered by utility management

at the time decisions had to be made."  Illinois Power Co. v. Illinois Commerce Comm'n, 245 Ill. App. 3d 367, 371, 612 N.E.2d 925, 929 (1993).  When a court considers whether a

judgment was prudently made, only those facts available at the time judgment was exercised

can be considered.  Hindsight review is impermissible.  Illinois Power Co., 245 Ill. App. 3d at 371, 612 N.E.2d at 929.

	In the instant case, the Commission determined, in relevant part, that the evidence

showed that, for the reconciliation period, Illinois Power acted reasonably and prudently in

its purchase of natural gas, except with regard to its decision to retire the Freeburg propane

plant.

	In Illinois Power's case before the Commission, Frank Starbody, Illinois Power's

director for gas supply, testified that he is responsible for the procurement of Illinois Power's

natural-gas supply and pipeline capacity, the transportation of customer-owned natural gas,

and Illinois Power's storage and transmission assets.  Starbody testified that in 2000, Illinois

Power purchased 55.2 million MMBtu of natural gas from various producers and marketers. 

Illinois Power also leased transportation and storage capacity via five interstate pipelines. 

Starbody stated that Illinois Power began the reconciliation period with eight underground gas-storage fields.  One field was retired during the reconciliation period.  Starbody said that

Illinois Power designs its supply portfolio so that firm natural-gas supply is sufficient to

meet requirements on a peak day.  For 2000, Illinois Power reserved sufficient pipeline

capacity and firm winter natural-gas supply to serve, along with the gas deliverable from

Illinois Power's storage fields, the gas load expected in weather conditions equivalent to the

coldest in the previous 20 years.  Starbody also testified that Illinois Power began the

reconciliation period with one propane plant facility with a peak-day deliverability

equivalent to 20,000 MMBtu of natural gas.  This facility was retired in 2000.  As a result,

during the reconciliation period, Illinois Power used existing propane inventory to operate

the propane plant prior to its retirement and did not need to acquire additional supplies of

propane during the reconciliation period.

	Starbody claimed that in order to continue operating the Freeburg propane plant, 

substantial capital expenditures would have been required.  The plant had obsolete

compressor controls and switchgear, the fire-protection and gas-detection equipment did not

conform to current standards, and the insulation in the refrigerated sphere that holds the

propane inventory required replacement.  Starbody opined that regulatory requirements

applicable to propane facilities could become more strict, thereby raising the concern that

the substantial expenditures that would have been necessary to renovate the propane plant

could prove insufficient within a few years.  Starbody stated that the facility was

grandfathered under earlier provisions of various codes and standards but that major

upgrades to the facility, including those that were needed in 2000, could cause the facility

to become subject to current versions of applicable codes and standards.  This would require

the propane plant to be brought into compliance with current codes and standards that would

require additional capital expenditures.

	Starbody was also concerned because the area around the Freeburg propane plant was experiencing significant growth in residential development.  Starbody stated that the risks

and consequences associated with gas leakage or fires that are inherent to propane facilities

were a matter of increasing concern.  Starbody claimed that the safety issues associated with 

the residential areas that were developing around the plant site were a significant factor in

the decision to retire the plant.

	Starbody also testified that operating a propane facility requires specialized training

and experience that is unique to Illinois Power's system.  The Freeburg facility was more

complex than the types of propane plants described in the Commission staff's testimony

because it included refrigeration, compression, and control equipment not present in other

types of propane facilities.  The need for specialized training and expertise, the infrequency

with which the plant actually needed to be operated, and the resulting lack of hands-on

experience for Illinois Power personnel were additional factors leading to the closing of the

Freeburg facility.  Starbody stated that Illinois Power had closed its four other propane

plants prior to 2000, which left the Freeburg facility as the sole remaining propane plant. 

This provided fewer opportunities for hands-on operating experience and meant that

operator training would be conducted solely to operate the Freeburg facility.

	Starbody opined that even with extensive upgrades to the Freeburg facility, the

reliability of the plant was a concern.  The Freeburg plant was placed in service in 1971 in

order to provide additional assurance of supply within Illinois Power's service area under

conditions of high demand.  At that time, natural-gas supplies and transportation were not

readily available.  Starbody stated that propane facilities are used only in extreme weather

conditions and so have typically been operated only a few days each winter season.  With

normal maintenance, there is a concern about the ability of equipment that is relied on only

sporadically to operate reliably when called upon.  Starbody said that from a reliability

standpoint, firm transportation and supply contracts are preferable to maintaining propane plants.

	Starbody testified that the cost of the capital improvements that would have been

necessary in 2000 in order to renovate the Freeburg propane plant for continued use was

$1.873 million and included work on the plant's control system, motor control center,

insulation, and fire protection systems and a new glycol heater, and new pumps.

	Eric Lounsberry, the Commission's gas-section supervisor of the engineering

department's energy division, testified that Illinois Power failed to provide sufficient

documentation to support its decision to retire the Freeburg propane facility.  Lounsberry

stated that Illinois Power had failed to provide any information showing that it had

performed an analysis necessary to make a prudent decision regarding the retirement of its

propane facility.  Lounsberry stated that absent such information, he was unable to determine

that Illinois Power had made a prudent decision.

	Lounsberry explained that a propane plant is a facility used by many gas utilities to

provide peak capacity during periods of extremely cold temperatures.  Propane plants

generally consist of a large number of propane tanks and the associated equipment that

allows for a propane and air mixture to be injected into a utility's natural-gas system. 

Lounsberry stated that Illinois Power had reported that its facility was installed in 1971 and

that it now had obsolete refrigeration compressor controls and switchgear.  Additionally,

Illinois Power reported that the plant's fire-protection and gas-detection equipment did not

conform to current standards and that the refrigerated sphere insulation was failing and

needed to be replaced.  Assuming the full operation of the plant, Illinois Power maintained

a three-day supply of propane at the facility.  Lounsberry stated that Illinois Power last used

the Freeburg facility on December 21, 2000, for the purpose of depleting the propane

inventory in order to allow for the abandonment of the facility.  Lounsberry stated that

although he requested that Illinois Power provide studies and analyses supporting its decision to retire the Freeburg plant, Illinois Power responded with "nothing but a list of the

problems at its facility."  Illinois Power reported that the cost to serve 20,000 MMBtu of

firm gas transportation capacity on the Natural Gas Pipeline Company of America (NGPC),

an amount equal to the daily capacity of the Freeburg propane plant, on an annual basis would be $1.273 million.

	Lounsberry opined that almost all machinery can be repaired and kept in service if

the owners and operators are willing to make the necessary capital improvements and

perform the necessary maintenance.  He believed that Illinois Power's propane plant was

such a project.  Lounsberry testified that Illinois Power had not provided him with the cost

of repairing the propane plant to keep it in service, even though he had requested the

information.  Lounsberry stated that since Illinois Power had failed to provide such

information, he recommended that the Commission find Illinois Power's decision to retire

the Freeburg propane plant to be imprudent and that the Commission disallow $1.273

million of the costs.  This amount was the figure that Illinois Power had provided to

Lounsberry as the cost to obtain 20,000 MMBtu of firm pipeline gas transportation capacity

on the NGPC system for one year.  We note that Lounsberry specifically requested the cost for one full year.

	After hearing all the evidence, the Commission determined, inter alia, that the evidence showed that for the calendar-year 2000 reconciliation period, Illinois Power acted

reasonably and prudently in its purchase of natural gas, except with regard to its decision to

retire its Freeburg propane plant.  The Commission concluded that an examination of the

prudence of a utility decision in a purchased-gas adjustment tariff reconciliation proceeding

should include an economic analysis unless the reasons supporting the utility's decision are

so significant and persuasive that they render an economic analysis unnecessary.  The

Commission stated that an economic analysis should have been included in this reconciliation proceeding where the prudence of retiring the Freeburg propane plant was at

issue.  The Commission determined that the safety and reliability of the plant are legitimate

concerns as the plant ages; however, the plant's past history over its 30-year life indicated

that there have been very few problems affecting its safety and reliability.  The Commission

stated that safety and reliability were not so significant that they precluded a need for an

economic analysis as a part of the decision on whether the plant should be retired.  Finally,

the Commission noted that according to the present-value-of-future-revenue-requirements

(PVRR) analyses presented in this proceeding, Illinois Power's PVRRs for continued

operation of the Freeburg plant are $5,630,160 for the 30-year period and $4,616,201 for

the 15-year period.  The Commission noted that these values most closely reflect its final

position.  The Commission stated that the primary dispute between Illinois Power and the

Commission staff concerned the PVRRs for the retirement of the plant and the replacement

of its capacity with a pipeline supply.  The Commission staff claimed that the PVRRs for the

retirement of the plant were $10,989,758 for the 30-year period and $8,056,872 for the 15-

year period.  The Commission staff's PVRR analysis results in PVRR savings for the

continued operation of the plant of $5,359,598 over the 30-year period and $3,440,671 over

the 15-year period.  Illinois Power claimed that the PVRRs for the retirement of the plant

were $5,297,160 for the 30-year period and $3,942,249 for the 15-year period.  Illinois

Power's base case PVRR analysis resulted in PVRR savings for the retirement of the plant

of $333,000 over the 15-year period and $673,952 over the 30-year period.  The difference

between Illinois Power's PVRRs and the Commission staff's PVRRs for the retirement of

the plant is due to the fact that Illinois Power assumed that it would need to buy pipeline

firm transportation (FT) capacity for only the five winter months at an annual cost of

$588,126, while the Commission staff assumed that Illinois Power would need to buy the

pipeline FT capacity for all 12 months of the year at an annual cost of $1.273 million.  The Commission staff noted that winter-only service is at a premium and that Illinois Power may

not be able to receive a discount from maximum rates for winter-only service.  Illinois Power

acknowledged that it had found it difficult in the past to economically lease pipeline capacity

on less than a 12-month basis, but it contended that the market had evolved so that it was

economical to purchase FT capacity for the winter season (November through March), but

at a premium over the summer season (April through October).  The Commission noted that

in determining whether it was prudent for Illinois Power to retire the Freeburg plant in early

2000, hindsight should not play a part.  The Commission stated that the question that needed

to be addressed is whether it was clear when Illinois Power made its decision to retire the

Freeburg plant in April 2000 that Illinois Power could purchase pipeline capacity for only

the winter season on an economical basis.  Illinois Power acknowledged that is was "less

clear" in April 2000 that such a purchase was possible than it had become by 2001.  Since

it was not reasonable prior to April 2000 to assume that it was economical for Illinois Power

to purchase FT capacity for the winter season only, the Commission concluded that the

Commission staff's PVRRs for the retirement of the Freeburg plant were reasonable and

should be accepted.  The Commission also determined that Illinois Power's PVRRs for the

retirement scenarios rely on information that was not known at the time that the decision to

retire the Freeburg plant was made and, therefore, constitute an impermissible hindsight

analysis.

	The Commission determined that the significant PVRR savings from the continued

operation of the Freeburg propane plant of $5,297,160 for the 30-year period and

$3,942,149 for the 15-year period outweighed the concern about the safety and reliability

of the plant identified by Illinois Power as the plant continues to age.  Finally, the

Commission concluded that Illinois Power's decision to retire the Freeburg plant in April

2000 was imprudent.  The Commission stated that since Illinois Power's decision to retire the Freeburg plant was imprudent, Illinois Power should not be allowed to recover from its

customers the cost of obtaining an amount of pipeline transportation capacity equal to the

capacity of the Freeburg facility.  The Commission then ordered Illinois Power to implement

Factor O refunds of $900,195 for Rider A customers, $57,600 for Rider B demand

customers, and $204 for Rider B commodity customers in its first monthly purchased-gas

adjustment tariff filing after the date of this order.  Illinois Power appeals.

	Illinois Power claims that the Commission's overall conclusion that its decision to

retire the Freeburg propane plant was imprudent hinges on three improper determinations

that were "erroneous, flawed[,] and unreasonable."  First, Illinois Power claims that the

Commission improperly determined that in order to prudently determine whether to retire

the 30-year-old facility, Illinois Power should have performed a PVRR analysis comparing

the costs, over a period of 15 to 30 years, of continuing to operate the Freeburg plant versus

the costs, over the same future period, of retiring the facility and replacing its capacity with

alternative sources.  Second, Illinois Power contends that the Commission erred in

determining that the factors that Illinois Power had actually considered in deciding to retire

the facility–such as age, safety, reliability, the need for capital expenditures, operator

training concerns, and growth and development in the vicinity of the plant–were not

sufficient bases for a prudent decision to retire the plant.  Finally, Illinois Power complains

that the Commission erred in its determination that the PVRR analysis must assume that

replacement pipeline transportation capacity for the Freeburg plant could only be purchased

on a year-round contract instead of for the five winter months, because it would not have

been reasonable to assume in early 2000 that pipeline capacity could be purchased for just

the winter months on an economical basis (even though this was known by the time the

Commission had made its decision in this case).  Illinois Power claims that this assumption,

standing alone, had a sufficient impact to change the ultimate results of the PVRR analysis.  Under the assumption that replacement pipeline capacity must be purchased for the entire

year, the PVRR analysis showed that the retirement of the plant was the higher cost

alternative but that under the "winter season only" assumption, the PVRR analysis showed

that the retirement of the plant was the lower cost alternative.

	The standard of review in appeals from orders of the Commission is as follows:

		"(d)  ***  The findings and conclusions of the Commission on questions of

fact shall be held prima facie to be true and as found by the Commission; rules,

regulations, orders[,] or decisions of the Commission shall be held to be prima facie

reasonable, and the burden of proof upon all issues raised by the appeal shall be upon

the person or corporation appealing from such rules, regulations, orders[,] or

decisions."  220 ILCS 5/10-201(d)  (West 2000).

Section 10-201(e)(iv) states, in relevant part, that this court shall reverse a Commission rule,

regulation, order, or decision, in whole or in part, if it finds that "[t]he findings of the

Commission are not supported by substantial evidence based on the entire record of

evidence presented to or before the Commission for and against such rule, regulation, order

or  decision."  220 ILCS 5/10-201(e)(iv) (West 2000).  The Commission's order will be set

aside if it appears that the Commission acted outside the scope of its authority or infringed

on a constitutional right or that its findings are against the manifest weight of the evidence. 

Citizens Utilities Co. v. Illinois Commerce Comm'n, 124 Ill. 2d 195, 206, 529 N.E.2d 510, 515 (1988).  The findings of the Commission are only prima facie evidence that its orders are reasonable, but this court is not obligated to believe that the facts in evidence establish

a given conclusion if the conclusion is not reasonable.  Thompson v. Illinois Commerce Comm'n, 1 Ill. 2d 350, 356, 115 N.E.2d 622, 625 (1953).  An administrative order will be set aside if it is "clearly unreasonable."  Monarch Gas Co. v. Illinois Commerce Comm'n, 261 Ill. App. 3d 94, 101, 633 N.E.2d 1260, 1266 (1994).

	The theory behind public utility regulation is that the Commission should fix rates

that  "might properly be supposed to result from free competition."  State Public Utilities Comm'n v. Springfield Gas & Electric Co., 291 Ill. 209, 218, 125 N.E. 891, 896 (1919).  It is undisputed that the Commission sets rates in two ways–by base rates or by an automatic-

cost-recovery mechanism.  Base rates attempt to recover a utility's costs through estimating

the total revenues necessary to recover its operating costs plus a cost of investor capital using

a specific formula.  Citizens Utility Co., 124 Ill. 2d at 200-01, 529 N.E.2d at 512-13.  There are circumstances, however, where particular utility costs are unique enough that

circumstances warrant a recovery through an automatic-cost-recovery mechanism.  Citizens Utility Board v. Illinois Commerce Comm'n, 166 Ill. 2d 111, 138, 651 N.E.2d 1089, 1102 (1995).  In City of Chicago v. Illinois Commerce Comm'n, 13 Ill. 2d 607, 150 N.E.2d 776 (1958), the Illinois Supreme Court highlighted  the Commission's discretionary authority to

allow a rate recovery for a utility's costs through a purchased-gas adjustment tariff.  This

authority was later codified at section 9-220 of the Act.  220 ILCS 5/9-220 (West 2000).

	Illinois Power's main argument centers around the Commission's conclusion that the

retirement of the Freeburg plant was erroneous because the Commission determined that a

PVRR analysis was necessary for prudent decision-making even though the Commission

had not required PVRR analyses in similar situations in the past.  The Commission

determined that the following standard should be used to assess the prudence of Illinois

Power's decision to retire the Freeburg propane plant: "Prudence is the standard of care

which a reasonable person would be expected to exercise under the same circumstances

encountered by utility management at the time decisions had to be made."  We also note,

however, that the prudence standard recognizes that reasonable persons can have honest

differences of opinion without one or the other necessarily being "imprudent."  Illinois Commerce Comm'n v. Commonwealth Edison Co., Ill. Commerce Comm'n Op. 84-0395 (October 7, 1987).  Illinois Power claims that although the definition of prudence is correct,

the Commission misapplied the definition by holding Illinois Power to a standard of care

that was inconsistent with what the Commission had required in similar situations in the

past.  More specifically, the Commission determined that an examination of the prudence

of a utility decision in a purchased-gas adjustment reconciliation proceeding should include

an economic or PVRR analysis unless the reasons supporting the utility's decision are so

significant and persuasive that they render an economic analysis unnecessary.  The

Commission also stated that it did not believe that the safety and reliability concerns were

so significant that they precluded the need for an economic or PVRR analysis as a part of

the decision on whether the plant should be retired.

	On appeal, the Commission claims that it did not require a PVRR analysis as a part

of prudent decision-making.  In fact, the Commission states that it required either a PVRR

analysis or some other form of economic analysis, which was nothing new because it had

always required some form of economic analysis.  However, the record does not support the

Commission's position.

	Both Illinois Power and the Commission staff agreed that the capital expenditures

immediately needed in 2000 in order to continue the operation of the facility were at least

$1.873 million.  A review of the Commission's order shows that the Commission staff's

recommendation that Illinois Power had acted imprudently in deciding to retire the Freeburg

plant rather than incur the capital expenditure needed to renovate was expressly based on

Illinois Power's failure to conduct a PVRR analysis.  Lounsberry stated as follows:  

	"I agree the amount of capital expenditure should be reviewed in the context of

whether the facility is economically viable versus the available alternatives. 

However, IP failed to conduct such a review ***.  The proper comparison for these types of costs is a present value of revenue requirements ('PVRR') for each.  Since IP failed to conduct such an analysis, I prepared an analysis using the information

available to me within this proceeding."  (Emphasis added.)

Neither the Commission nor its staff identified any other form of economic analysis, short

of a PVRR analysis, that they would have considered sufficient to demonstrate prudent

decision-making.

	In its brief, the Commission points out that Illinois Power had conducted "some

economic analyses" of the projects that it had approved as prudent in Illinois Power Co.:  Proposed General Increase in Gas Rates, Ill. Commerce Comm'n Op. 93-0183 (April 6, 1994), and Illinois Power Co.: Proposed General Increase in Electric Rates, Ill. Commerce Comm'n Op. 91-0147 (February 11, 1992).  In number 93-0183, the Commission considered

whether numerous capital projects were prudent and reasonable and should be included in

Illinois Power's gas rate base.  One of these projects was the Hillsboro storage field

expansion and pipeline project, which had a capital cost of $54.706 million (or 30 times the

capital investment that was needed to continue to operate the Freeburg propane plant).  In

number 93-0183, Illinois Power conducted and presented a PVRR analysis of whether the

Hillsboro storage field and pipeline project should be built as a part of showing the prudence

of undertaking the project.  In addition to the Hillsboro project, the Commission considered

and allowed in the rate base eight other new capital projects, only one of which Illinois

Power justified with a PVRR analysis.  Each of the eight cases involved a capital

expenditure equal to or in excess of the approximately $1.9 million expenditure that would

have been required in 2000 to continue to operate the Freeburg facility.  Pursuant to section

9-211 of the Act (220 ILCS 5/9-211 (West 2000)), the Commission could only include the

costs of these projects in Illinois Power's rate base if it found that those costs were

"prudently incurred."  The Commission found all eight of the projects to be prudent and

reasonable even though Illinois Power presented a PVRR analysis to justify only one of them.

	In number 93-0183, one of the capital projects that was considered included the

addition of the "construction tracking feature" and the "marketing and expanded services

feature" to Illinois Power's customer information system.  The Commission staff opposed

its inclusion in the rate base because Illinois Power had not presented a net-economic-

benefits analysis of those projects.  However, the Commission rejected that argument and

stated, "Staff's strict cost/benefit test for these features is an inappropriate standard that is

not reflected in the *** Act."  The Commission went on to note that Illinois Power's

evidence concerning the increased efficiency and the improved customer service that would

result from those features justified the inclusion of the costs in the rate base.

	In number 91-0147, the Commission indicated that Illinois Power had performed an

economic-benefits analysis for the project at issue in that case, and the dispute was about the

type or quality of the analysis that had been performed.  More specifically, Illinois Power

performed an analysis merely to determine how many years it would take before the project

at issue began to produce savings, as opposed to a PVRR analysis over the life of the asset. 

The Commission stated that section 9-211 of the Act (220 ILCS 5/9-211 (West 2000)),

which imposes a prudence test, does not set forth any specific types of analyses that a utility

must perform.  In fact, the Commission stated as follows: "While Staff proposes that a

proper, net present value economic benefits test pertaining to BFMS [Business and Financial Management System] should have been performed by IP, the Commission cannot conclude that failure to perform such a test is sufficient basis for excluding BFMS from rate base.  Therefore, Staff's proposed adjustment is rejected."  (Emphasis added.)  Illinois Power Co.:  Proposed General Increase in Electric Rates, Ill. Commerce Comm'n Op. 91-0147 (February 11, 1992).

	Illinois Power once operated five propane plants as a part of its gas system, but it had retired the other four propane plants prior to 2000.  Two of the propane plants were retired

in 1994 (Illinois Commerce Comm'n v. Illinois Power Co., Ill.  Commerce Comm'n Op.  95- 0122 (December 9, 1998)), one plant was retired in 1995 (Illinois Commerce Comm'n v. Illinois Power Co., Ill. Commerce Comm'n Op. 96-0035 (December 9, 1998)), and the other plant was retired in 1996 (Illinois Commerce Comm'n v. Illinois Power Co., Ill. Commerce Comm'n Op. 97-0018 (November 5, 1998)).  It is undisputed that the Commission's orders

in the annual purchased-gas adjustment charge reconciliation proceedings conducted for

each of those years do not show that any issue was raised with respect to the prudence of

Illinois Power's decision to retire the other four propane plants.  No issue was raised with

respect to Illinois Power's failure to conduct PVRR analyses of whether to retire the propane

plants or continue them in service.  In fact, in each of these cases, the Commission's orders

state that Illinois Power acted reasonably and prudently in its purchases of natural gas and

transportation.

	The Commission addressed this issue by stating that the retirement of the other four

propane plants without the consideration of a PVRR analysis is not determinative of whether

a PVRR analysis should be a part of the decision to retire the Freeburg plant.  The

Commission stated, "There has been no showing that the circumstances for retiring the other

four plants are the same as those pertaining to the retirement of the Freeburg plant."  The

Commission relies primarily on Mississippi River Fuel Corp. v. Illinois Commerce Comm'n, 1 Ill. 2d 509, 116 N.E.2d 394 (1953), to support its position.

	In Mississippi River Fuel Corp., the Commission had entered an order finding Mississippi River Fuel Corp. (MRFC) to be a public utility under the Act, based on its gas

sales to retail customers.  On appeal, the MRFC argued that the Commission was precluded

from reaching this conclusion because in an earlier case, in 1948, the Commission had found

that MRFC was not a public utility.  The Illinois Supreme Court stated that the Commission was not precluded by its earlier order from reaching a different result in the case before it. 

However, the court then stated that although the 1948 Commission decision did not have the

binding effect sought by Mississippi, it illustrated the fact that the Commission, by its

inaction for a period of almost 20 years, construed the Act as not applicable to Mississippi. 

The court noted that even though the courts are not bound by the Commission's construction

of the Act, "such a consistent and long-standing administrative interpretation cannot but

have persuasive effect."  Mississippi River Fuel Corp., 1 Ill. 2d at 514, 116 N.E.2d at 397.  The court then ruled that MRFC should not have been found to be a "public utility," and it reversed the Commission's determination to that effect.

	In the instant case, the Commission failed to point out what relevant differences in

circumstances existed between the retirement of the first four propane plants and the

retirement of the Freeburg propane plant.  It is undisputed that significant capital

expenditures were needed to keep the plant operational and that there were legitimate safety

and reliability concerns about the continued operation of the plant due to the growth in the

development of the area surrounding the plant site and the trend of this growth continuing

into the future, even though the Commission determined that those concerns were not

sufficient to justify the retirement without a justification by a PVRR analysis.  We note,

however, that Starbody testified that he was not sure how one would quantify the dollar

impact of the safety issues, for purposes of a quantitative analysis.  In fact, the PVRR

analysis presented by Commission staff included no quantification of the dollar impact of

these safety issues, even though the Commission stated, in its order, that the "safety and

reliability of the plant are a legitimate concern as the plant continues to age."  Additionally,

neither Illinois Power nor the Commission staff identified any operating-cost savings at the

propane plant that would result from the necessary capital expenditures.  Illinois Power's

testimony shows that operating and maintenance costs for the plant would continue to grow at a rate faster than the inflation rate. 

	We note, however, that in evaluating whether to retire the Freeburg propane plant in

2000, Illinois Power had the experience of retiring four propane plants within the preceding

six years without conducting PVRR analyses and without being told by the Commission that

PVRR analyses were necessary in order to show prudence in making such decisions.  In fact,

the prior Commission decisions and other experience would have led one to conclude that

a PVRR analysis was not necessary with respect to this decision.  Hence, in early 2000,

when Illinois Power was deciding whether to retire its last remaining propane plant or to

expend approximately $1.9 million in capital improvements and upgrades to keep the

Freeburg plant operational, there would have been no reason, based on past experience, that

a "reasonable person" should have concluded that a PVRR analysis was necessary as a part

of prudent decision-making.  In fact, section 9-220(a) of the Act does not set forth any

specific type of analysis that a utility must perform to show that its costs are prudent.  Illinois Power Co.: Proposed General Increase in Electric Rates, Ill. Commerce Comm'n Op.  91- 0147 (February 11, 1992).  We note that the Commission, in its order, pointed to no statutory provision or regulation of the Commission that required a PVRR analysis to establish

prudence in these circumstances.  Additionally, the Commission did not point to any prior

decisions or any other sources of a "standard of care" that should have led a reasonable

person to conclude that a PVRR analysis was a necessary component of prudent decision-

making in deciding whether to invest more capital into the Freeburg plant or retire it. 

Although "prudence" is a determination within the Commission's discretion, the Illinois

Supreme Court has stated, "[N]o matter how much discretion the Commission is afforded

***, its decisions are entitled to less deference when it drastically departs from past

practice."  Business & Professional People for the Public Interest v. Illinois Commerce Comm'n, 136 Ill. 2d 192, 228, 555 N.E.2d 693, 709 (1989).  The Commission's decision in the instant case was such a departure.  The Commission did not adopt a new standard or

policy.  It merely decided after the fact that a PVRR analysis should have been conducted

in determining the prudence of an action that had already been taken.

	From the foregoing facts, we find that the Commission created after the fact the standard of care a reasonable person should have followed in early 2000 when deciding

whether to retire the Freeburg plant, and it applied it in hindsight to judge the prudence of

Illinois Power's actions.  The Commission's finding that a PVRR analysis was required in

the instant case was not supported by substantial evidence; hence, that finding was arbitrary

and unreasonable.  Therefore, Illinois Power was not "imprudent" for failing to conduct a

PVRR analysis in order to substantiate its decision to retire the Freeburg propane plant.

	Next, Illinois Power claims that it met its burden of proving that the retirement of the

Freeburg facility was a reasonable and prudent decision based on the factors that it 

considered.  We agree.

	Regarding the decision on whether to retire the Freeburg propane plant, the record

shows that Illinois Power considered the following: (1) the plant's age, (2) the plant's safety,

(3) plant reliability concerns, (4) the need for significant expenditures on the facility for

renovations and upgrades (immediately and in the future), (5) the growth and development

trends in the Freeburg and Smithton areas of St. Clair County, (6) the fact that Freeburg was

Illinois Power's last remaining propane plant, (7) the liability risk that the plant presented,

and (8) the ability to replace the plant's capacity with an alternative that offered greater

reliability, safety, flexibility, and convenience than the Freeburg propane plant.

	A  review of the record shows that the Commission considered each of the foregoing

factors in isolation rather than considering them collectively in analyzing whether the

retirement of the Freeburg propane plant was warranted.  Such an analysis by the

Commission was flawed, which resulted in an arbitrary and unreasonable finding that Illinois Power did not make a reasonable and prudent decision when it retired the Freeburg

propane plant.

	The Commission noted that Lounsberry's testimony showed that the closest "new

residential development" was 4.3 miles from the propane plant site toward the town of

Smithton.  Additionally, the Commission staff claims that there should be no safety concerns

because the threat to human safety from a catastrophic accident at the propane plant only

extends for 1.75 miles.  We note, however, that Starbody testified that "there are 27 houses

along the road that runs from the plant site to the subdivision" that Lounsberry referenced. 

 This includes eight homes within a mile of the plant site and another eight homes within

two miles of the plant.  Several of those homes had been built "within the last few years." 

The Freeburg village limits are 2.5 miles north of the propane plant site along Illinois

Highway 13.  The area extending approximately 1.4 miles south of Freeburg along Highway

13 had recently been rezoned from farmland to commercial.  Highway 13, which runs by the

propane site, had recently been widened and resurfaced, and a new bridge had been built on

Highway 13 north of the plant.  Starbody stated that Illinois Power based its decision not

only on the proximity of development to the plant site currently but also on the likelihood

that development would continue to move closer to the site over the 10 to 15 additional

years that it would need to operate the propane facility in order to justify the approximately

$1.9 million capital expenditure it was considering.  Starbody opined that Lounsberry's

dismissal of this issue on the ground that the closest development was currently 2.5 miles

away in one direction and 4.3 miles away in another direction was inconsistent with his

position that the decision to retire or continue to operate the propane plant should have been

based on an analysis extending 30 years into the future.

	The Commission staff claims in its brief that in response to a staff discovery request,

Illinois Power provided two "maps," neither of which showed residential encroachment near the Freeburg plant.  This misstates the record.

	The Commission staff requested and Illinois Power provided aerial photographs of

the area in question.  Illinois Power provided the photographs that it had available, which

had been taken on April 3, 1997, more than four years prior to the hearing in this case. 

Starbody explained that a number of the homes which are now located between the new

residential development and the plant site are not shown on the aerial photograph because

they were built within the last several years.

	Additionally, Lounsberry's claim that the trend of the development in the area of the

propane plant was not a factor that supported the retirement of the facility was inaccurate. 

Starbody testified that the populations of Smithton and Freeburg had grown considerably

since 1970 when the Freeburg plant was originally built.  Starbody stated that the

development in the area would continue to increase because Freeburg is close to St. Louis. 

Starbody pointed out that commercial areas on the Illinois side of the Mississippi River are

developing.  He also focused on the ease of commuting, the recent availability of commuter

rail transportation to St. Louis, the attractiveness of the area as a "bedroom" community, the

fact that new homes continued to be built in locations increasingly closer to the propane

plant site, the recent rezoning of the area from the Freeburg limits to within about one mile

from the plant from "farmland" to "commercial," and recent improvements to the State

highway that runs south from Freeburg, through the rezoned area, past the propane plant.

	The Commission claims that if Illinois Power was concerned about the trend of the

development in the area of the propane plant for 10 to 15 years into the future, it should have

conducted an economic analysis of the necessary capital expenditures over the 10-to-15-year

period.  The record shows that although Starbody testified that Illinois Power was concerned

about the continuing trend of development in the area over the next 10 to 15 years, Lounsberry's PVRR analysis assumed that Illinois Power would need to operate the Freeburg plant for another 15 to 30 years in order to recover the $1.873 million capital expenditure that the plant needed in 2000.  Additionally, the PVRR analysis that was presented by the

Commission staff made no provision for any additional capital expenditures on the propane

plant in order to keep it operating over the 15-to-30-year period covered by the study. 

Illinois Power estimated that additional capital expenditures of $200,000 every three years

would be needed, and it identified a number of specific capital projects to replace or

renovate the plant components that would have been needed over the next several years had

the facility continued to operate.  Starbody testified that it was uncertain how to quantify the

dollar impact of the safety issues for purposes of a quantitative analysis.  The Commission

staff's PVRR analysis, which the Commission accepted as dispositive in its order,

incorporated no quantification of these issues.  In fact, the only way that Illinois Power could

have eliminated the risks associated with the continued growth in the area would be to buy

all of the real estate for some distance around the plant, which would impose additional

costs. 

	Additionally, Illinois Power retained Packer Engineering (Packer) to perform an

independent safety analysis of the Freeburg facility.  The Commission ignored the finding

by Packer that an explosion at the propane plant would damage buildings up to three miles

away.  Packer pointed out that the distance from the facility to the nearest community was

not a sufficient buffer zone to protect the residents from injury and/or property damage. 

Packer also noted that the risks associated with propane accidents are not limited to

residences and businesses in the surrounding area but also affect plant employees and

emergency response personnel.  Dr. Ogle, a Packer employee, testified that when accidents 

have occurred at other propane facilities, it has often been employees and emergency

response personnel who have been injured or killed, rather than bystanders in the area. 

Packer also noted that the area from Freeburg to about one mile from the propane plant had recently been rezoned from farmland to commercial and that this suggested that commercial

development would occur in that area.  Finally, Packer estimated that filling the 800,000-

gallon propane storage vessel, which provides enough inventory to operate the facility for

three days, requires deliveries of propane by 90 tanker trucks.  Therefore, the continued

operation of the Freeburg facility would necessitate considerable travel through the

surrounding area by tanker trucks loaded with propane.  These are some of the factors that

Illinois Power used to make its decision to close the Freeburg facility.

	Based on the foregoing facts, Illinois Power made a decision that it did not want to

be responsible, in an area of St. Clair County that is experiencing growth and development,

for ensuring the safety of a facility storing 800,000 gallons of volatile, flammable liquid

propane in a 30-year-old, above-ground structure that an expert concluded had probably

exceeded its expected operating life.  Additionally, the Freeburg propane plant was only

needed about three days per year.  The record shows that there are safer, more reliable, and

more convenient alternatives for providing the same service to customers, even though it

was estimated by the Commission to be more expensive.  Hence, the Commission's

conclusion that Illinois Power was imprudent in retiring the propane plant was unreasonable.

	We need not address Illinois Power's final argument in this case, since we have

determined that the Commission erred in finding that a PVRR analysis was necessary in this

case.

	For the foregoing reasons, we reverse the Commission's order with respect to its

finding and conclusion that Illinois Power's decision to retire the Freeburg propane plant was

imprudent, and we remand this case to the Commission with directions to enter an order

consistent with this court's decision.

	Reversed; cause remanded.

	HOPKINS, P.J., and GOLDENHERSH, J., concur.

                                     	NO. 5-02-0065

	IN THE

	APPELLATE COURT OF ILLINOIS

	FIFTH DISTRICT

___________________________________________________________________________________

ILLINOIS POWER COMPANY,			)  Petition for the Review of

							)  an Order of the Illinois

	Petitioner,					)  Commerce Commission.   

							) 

v.							)  No. 00-0714

							)

THE ILLINOIS COMMERCE COMMISSION 	)

and THE PEOPLE OF THE STATE OF		)

ILLINOIS,						)

							)

	Respondents.				)

___________________________________________________________________________________

Rule 23 Order Filed:			April 1, 2003

Motion to Publish Granted:		May 9__________, 2003

Opinion Filed:					May 9__________, 2003

___________________________________________________________________________________

Justices:	Honorable Gordon E. Maag, J.

	Honorable Terrence J. Hopkins, P.J., and

	Honorable Richard P. Goldenhersh, J.,

	Concur

___________________________________________________________________________________

Attorneys	Joseph L. Lakshmanan, Assistant General Counsel, Illinois Power Company, 500

for	South 27th Street, Decatur, IL 62521; Owen E. MacBride, Schiff, Hardin & Waite,

Petitioner	6600 Sears Tower, Chicago, IL 60606

___________________________________________________________________________________

Attorney	John P. Kelliher, Special Assistant Attorney General, Illinois Commerce Commission,

for	160 North LaSalle Street, Suite C-800, Chicago, IL 60601

Respondents	

___________________________________________________________________________________