Title: Archer-Daniels-Midland Co. v. Illinois Commerce Comm'n
Citation: N/A
Docket Number: 84898, 84899
State: Illinois
Issuer: Illinois Supreme Court
Date: December 3, 1998

ADM v. Illinois Commerce Commission, Nos. 84898, 84899 (Ill. S.Ct.) 
Docket Nos. 84898, 84899 cons.--Agenda 31--September 1998.
Opinion filed December 3, 1998.
JUSTICE HEIPLE delivered the opinion of the court:
Central Illinois Public Service Company (CIPS) and the Illinois Commerce 
Commission (Commission) appeal the decision of the appellate court (293 Ill. 
App. 3d 459) reversing the Illinois Commerce Commission's order allowing the use 
of CIPS's fuel adjustment clause (FAC)(1) 
to recover costs associated with a fuel contract modification. We now reverse 
the judgement of the appellate court and hold that the fuel contract 
modification costs and associated carrying costs, or interest costs, are 
recoverable through an FAC.
BACKGROUND
In 1975, CIPS entered into a long term contract for the purchase of 
high-sulfur coal from AMAX Coal Company (AMAX). This contract, amended several 
times since 1975, provided that CIPS would purchase from AMAX's Delta Mine a 
minimum of 1.3 million tons of high-sulfur coal annually through December 31, 
2002, for use in CIPS's Newton 1 generating unit. The initial price for the coal 
was fixed by the contract and was adjusted periodically through the use of 
preagreed escalators.
The primary source for the coal was AMAX's Delta Mine. However, the contract 
also allowed AMAX to deliver to CIPS coal from alternate sources so long as this 
coal was of the same or better quality as the Delta Mine coal. The contract did 
not allow CIPS to designate the source of this alternate source coal, and the 
contract price of the coal was not adjusted to reflect the actual cost of the 
alternate source coal to AMAX. Thus, any difference in contract price and market 
price accrued to the benefit of AMAX alone.
By 1993, the circumstances under which the contract was originally negotiated 
had significantly changed. First, the escalated cost of the high-sulfur coal 
from the Delta Mine contract significantly exceeded the market price of both 
high- and low-sulfur coal. Thus, AMAX was able to purchase alternate source coal 
on the open market and resell that coal to CIPS at the higher contract price, 
thereby depriving CIPS of the benefits of the lower market prices for coal.
Second, the scrubber at CIPS's Newton 1 generating unit where the Delta Mine 
high-sulfur coal was burned was deteriorating and needed to be either renovated 
or retired. This scrubber reduced sulfur dioxide emissions to levels permitted 
by state and federal environmental laws and enabled CIPS to burn the high-sulfur 
coal. If the scrubber was retired, then CIPS could no longer burn high-sulfur 
coal, but instead could burn only low-sulfur coal which did not require the use 
of a scrubber. Although CIPS could renovate the scrubber rather than retire it, 
the cost was in excess of $70 million along with $10 million in annual operating 
costs.
Given the above-market price for the Delta Mine coal and the deterioration of 
the scrubber, CIPS began negotiations with AMAX in an attempt to restructure the 
Delta Mine contract. After considering various options, CIPS concluded that the 
most cost-effective option was to retire the Newton 1 generating unit scrubber 
and restructure the Delta Mine contract to allow the purchase of low-sulfur 
coal.
The restructured agreement provided that CIPS could locate and negotiate with 
third-party coal suppliers. AMAX would then purchase this alternate source coal 
at market price, and resell the coal to CIPS with no mark up. Consequently, 
under the modified contract, CIPS would receive the benefit of lower market 
prices for alternate source coal. Additionally, CIPS could purchase low-sulfur 
coal, thereby eliminating the need for the deteriorating scrubber and saving the 
renovation costs. Finally, CIPS would not be required to purchase a minimum 
amount of coal in any year, but instead would have an open-ended obligation to 
eventually purchase 7.8 million tons. CIPS anticipated satisfying this 
obligation by the end of 2002.
In return for these contract modifications, CIPS agreed to pay AMAX a 
one-time payment of $70 million, an amount CIPS would finance itself at an 
annual interest rate of approximately 7.25%. The modified agreement, however, 
was contingent upon a finding by the Commission that the payment and carrying 
costs could be passed on to CIPS's customers through the FAC. Consequently, CIPS 
sought the Commission's approval. Appellees, Archer-Daniels-Midland Company, 
Marathon Oil Company, and Quantum Chemicals Company, collectively known as the 
Illinois Industrial Energy Consumers, intervened in the proceedings to challenge 
CIPS's proposal to pass the contract modification costs through the FAC.
In the proceedings before the Commission, CIPS produced evidence that in the 
period between 1996 and 2015, the contract modifications would produce a 
"Present Value of Revenue Requirements" of approximately $128 million less than 
renovating the scrubber and continuing the use of high-sulfur coal under the 
Delta Mine contract terms. Ninety-four percent of these benefits would be 
realized by customers between 1996 and 2005.
CIPS proposed to pass both the $70 million payment and the savings resulting 
from the contract restructuring through its FAC. The payment and carrying costs 
would be passed through the FAC by applying an $11.09 prepayment charge for each 
ton of coal purchased, up to a total of 7.8 million tons. This "prepayment/ton" 
charge, however, would be offset by the resulting savings from the contract 
restructuring. Thus, CIPS estimated that its customers would realize a savings 
of $4.5 million through the FAC in 1997 alone, a 4.6% reduction in the overall 
retail FAC charge for that year. Over the life of the contract, CIPS anticipated 
that its customers would realize a total net savings through the FAC of 
approximately $14 million. Finally, CIPS proposed that if its estimate of 
savings to customers was overly optimistic, it guaranteed that customers would 
not pay an amount in excess of the amount they would have paid had the Delta 
Mine contract not been restructured. In other words, CIPS guaranteed the 
Commission that in a worst case scenario, CIPS's customers would pay the same 
amount for fuel as they did under the original Delta Mine Contract.
The Commission ultimately approved both the contract modification and the 
passing of the payment and associated carrying costs through the FAC. In 
approving the use of the FAC, the Commission found that the payment of $70 
million and associated carrying costs were incurred by CIPS directly in 
realizing fuel savings over the life of the AMAX coal contract. Using the FAC 
would allow customers who experience reduced FAC charges via the contract 
modifications to also pay the costs of reducing those FAC charges. Moreover, the 
Commission found that allowing the use of the FAC in this context would 
encourage the buying-out or restructuring of uneconomic contracts.
The appellate court, however, reversed the order of the Commission. The 
appellate court found that the restructuring cost was not a "direct cost of 
fuel," and the cost could therefore not be passed through the FAC. Secondly, the 
appellate court held that the decision of the Commission constituted improper 
single-issue ratemaking. Accordingly, the appellate court disallowed CIPS from 
passing the contract restructuring costs through the FAC.
ANALYSIS
In reviewing an order of the Commission, "[t]he findings and conclusions of 
the Commission on questions of fact shall be held prima facie to be 
true and as found by the Commission [and] rules, regulations, orders or 
decisions of the Commission shall be held to be prima facie reasonable 
***." 220 ILCS 5/10-201(d) (West 1996). Indeed, the Commission is entitled to 
great deference because it is an administrative body possessing expertise in the 
field of public utilities. United Cities Gas Co. v. Illinois Commerce 
Comm'n, 163 Ill. 2d 1, 12 (1994). However, the Commission's interpretation 
of a question of law is not binding on a court of review. United Cities 
Gas, 163 Ill. 2d  at 12.
Section 9-220 of the Illinois Public Utilities Act (Act) states:
Given this statutory language, the contract restructuring cost and associated 
carrying costs may be passed to consumers through the use of an FAC if these 
costs are "costs of fuel."
The Illinois Administrative Code (Code) states that "costs of fuel" include 
"direct cost[s] of fuel." 83 Ill. Adm. Code §425.40(c)(1) (1996). Specifically, 
section 425.40(c)(1) provides:
Additionally, the Commission's order adopting a uniform fuel adjustment 
clause provides guidance as to what items may properly be flowed through an FAC 
as a "cost of fuel." Re Uniform Fuel Adjustment Clauses, 45 Pub. Util. 
Rep. 4th 1 (1981) (UFAC order). In setting forth the purposes of an FAC, the 
UFAC order states:
The appellate court interpreted this language as requiring that only "direct 
costs of fuel" due to uncontrolled fluctuations in fuel prices beyond the 
control of a utility may be passed through an FAC. While we agree that one of 
the purposes of an FAC is to ameliorate the adverse effects of uncontrolled fuel 
price fluctuations, the UFAC order as a whole does not support such a limited 
use for an FAC.
The Commission in adopting the UFAC expressed concern that the use of FACs 
would discourage prudent purchasing of fuel by removing incentives for utilities 
to bargain for the lowest procurement prices. 45 Pub. Util. Rep. 4th at 19 
(stating that "[i]t is absolutely essential, if fuel adjustment clauses are to 
be used correctly, that the manner by which a utility acquires, handles, and 
accounts for fuel supplies be wholly prudent and defensible"). Stated another 
way, a utility's profits are not adversely affected by increased fuel costs if 
those costs can be directly passed on to consumers.
Given this potential for disincentive, the Commission stressed in the UFAC 
order that utilities must engage in prudent purchasing practices:
Relying upon this language, the Commission in Illinois Commerce Comm'n v. 
Interstate Power Co., Ill. Commerce Comm'n Order 92-0335 (September 25, 
1996), allowed a utility to flow a contract buy-out cost through its FAC as a 
"cost of fuel." In deciding whether this recovery mechanism was permissible, the 
Commission found that allowing the pass-through of the buy-out cost was 
consistent with the spirit of the UFAC. Specifically, allowing the pass through 
would foster prudent purchasing practices by encouraging the efficient use of 
resources and encouraging utilities to alter uneconomic contracts. 
Interstate Power, Ill. Commerce Comm'n Order 92-0335 (September 25, 
1996).
Although Interstate Power explicitly stated that the decision was 
"for the purposes of this docket only," the Commission in the present case found 
that Interstate Power's rationale applied with equal force to the 
present case. We agree.
The $70 million payment and associated carrying costs in the present case 
were incurred by CIPS in an attempt to reduce the cost of fuel to its customers. 
CIPS was free to leave the uneconomic Delta Mine contract unaltered. However, 
CIPS, by engaging in "prudent purchasing" practices, monitored its contract and 
sought to change it when it became disadvantageous to its customers. This is 
precisely the type of prudent contract monitoring which the Commission sought to 
encourage in the UFAC order. Indeed, disallowing the flow-through in this case 
would create the very danger about which the Commission was concerned when it 
adopted the UFAC, namely, removing incentives for utilities to engage in prudent 
purchasing practices.
Although respondents argue that the contract restructuring was motivated by 
the nonfuel savings realized by the retirement of the scrubber, we find that 
costs of a fuel contract modification which produce nonfuel as well as 
fuel savings may be appropriately flowed through an FAC. As stated in the UFAC 
order, prudent fuel purchasing by a utility requires it to consider numerous 
factors in assessing the benefits of its fuel procurement practices. 45 Pub. 
Util. Rep. 4th at 20 (stating that a utility should, in assessing near and 
long-term fuel requirements, consider factors such as operating performance of 
plants, alternative fuel source options, and changes in regulatory 
requirements). Thus, CIPS was not required to consider the benefits of the 
contract restructuring in a vacuum. Rather, CIPS was free to choose the contract 
modifications which produced the greatest amount of overall savings, both fuel 
and nonfuel. Consequently, the contract restructuring costs are "costs of fuel" 
as contemplated in the UFAC order and section 9-220 of the Act (220 ILCS 5/9-220 
(West 1996)), regardless of whether CIPS realizes nonfuel benefits from the 
contract restructuring.
We also disagree with the appellate court's conclusion that the Commission's 
refusal to allow entry of the contract restructuring costs in "Fuel Stock 
Account #151" "demonstrates that recovery is not proper through the FAC." 293 
Ill. App. 3d at 466. Section 425.40(c)(1) of the Code limits "direct fossil fuel 
costs" to costs which have been cleared upon consumption from account No. 151. 
83 Ill. Adm. Code §425.40(c)(1) (1996). The Commission concluded that, although 
the restructuring cost may be flowed-through the FAC, the costs were not "fuel 
stock" and could not therefore be entered into account No. 151.
The Commission's conclusion that the contract restructuring costs were not 
classifiable as "fuel stock" does not imply that these costs may not be passed 
through an FAC. Although section 425.40(c)(1) limits "direct" costs of fuel to 
costs cleared from consumption from account No. 151, the category of costs 
passable through an FAC is broader than "direct" costs of fuel. Indeed, the 
language of section 9-220 of the Act requires only that a recoverable cost be a 
"cost of fuel." 220 ILCS 5/9-220 (West 1996). Consequently, at most the 
Commission's accounting treatment evidences its belief that the contract 
restructuring costs were not "direct" costs of fuel. However, as already shown 
from the language of the UFAC order and section 9-220 of the Act (220 ILCS 
5/9-220 (West 1996)), "costs of fuel" recoverable via an FAC are not limited to 
"direct" costs. See 83 Ill. Adm. Code §425.40(c)(1) (1996) (stating that "cost 
of fuel shall include direct costs of fuel" (emphasis added)). 
Therefore, the Commission's accounting treatment does not alter our conclusion 
that the contract modification costs may be passed through an FAC as "costs of 
fuel."
Finally, we also find the appellate court erred when it held that the 
decision of the Commission resulted in improper single-issue ratemaking. In a 
general base rate proceeding, the rule against single-issue ratemaking requires 
that the Commission "examine all elements of the revenue requirement formula to 
determine the interaction and overall impact any change will have on the 
utility's revenue requirement." Citizens Utility Board v. Illinois Commerce 
Comm'n, 166 Ill. 2d 111, 138 (1995). However, this rule does not apply 
"except in the context of a complete base rate proceeding." Citizens Utility 
Board, 166 Ill. 2d  at 137 (holding that the prohibition of single-issue 
ratemaking does not apply in relation to the use of rider mechanisms). It is 
undisputed that the proceeding before the Commission was not a complete base 
rate proceeding. Thus, the rule against single-issue ratemaking has no 
application in the present case.
In sum, we hold that contract restructuring costs and associated carrying 
costs are "costs of fuel." As such, the costs may be recovered through the use 
of an FAC.
CONCLUSION
For the reasons stated, the judgment of the appellate court is reversed and 
the order of the Commission is confirmed.
Appellate court judgment reversed;
Commission order confirmed.
JUSTICES BILANDIC and NICKELS took no part in the consideration or decision 
of this case.
1. An FAC "is a tariff provision, approved by the commission 
in advance, as a policy option, whereby a change in certain fuel costs and 
incidental costs thereto will automatically permit a change in the price charged 
consumers, without the delay and expense of a formal regulatory hearing. This 
mechanism eases administrative burdens and reduces the likelihood of financial 
jeopardy of the utility during adverse economic conditions." Adoption of 
Uniform Fuel Adjustment Clause(s), Ill. Commerce Comm'n Order 78-0457 
(November 10, 1981).