Opinion ID: 2088513
Heading Depth: 1
Heading Rank: 1

Heading: Five-Year Period

Text: One of the unique aspects of the Sixth Order is it covers a five-year period. The Act is silent as to whether the Commission may set rates for a specific period of time. As we indicated earlier, however, the Act does not appear to permit that type of limitation inasmuch as a utility may file for a rate increase at any time. In establishing rates, the Commission considers the revenues and expenses of the utility. To more accurately determine these figures, the Commission established an administrative rule, General Order 210 (83 Ill. Adm. Code § 285.150 (1985)). Under General Order 210, the utility must file its rate data in accordance with a proposed one-year test year. This test year may be an historical, current or future year. The test-year rule prevents a utility from mismatching revenues and expenses. The utility cannot use a low revenue figure from one year and a high expense figure from another year to bolster its evidence in support of a rate increase. In turn, the Commission decides what test year would be most appropriate and bases its rate decisions on the test-year data. In the case at bar, Staff and Edison proposed a 1987 test year, which the Commission adopted. The intervenors contend the Commission violated its own General Order 210 by imposing rates for a five-year period. The intervenors argue that data for a one-year period cannot accurately justify rates for a five-year period. Moreover, the intervenors contend the Commission, by imposing the test-year rule, intended to limit itself to setting rates for only a one-year period. Thus, the Commission, on its own, set the one-year limit, but then violated that limit by setting rates for a five-year period. The intervenors' argument has merit. The Commission, in the Sixth Order, stated: The Commission adopts Staff's 1987 Test Year. However, in reviewing the evidence in light of Staff's proposal, consideration should be given to the fact that adoption of any such proposal will result in rates which will remain in effect for five years. If Staff's proposal for a five-year rate moratorium is not adopted, the adjustment to rate base and operating income recommended by Staff and other parties but not adopted in this Order may be reconsidered. Although the Commission adopted the 1987 test year, it acknowledged the test year was not adequate to justify an order which would set rates for five years. The Commission said it would reconsider the rates if Edison did not accept the five-year proposal. We should also point out that the Commission did not adopt a new five-year test period or any other new standard. The Commission simply stated it would give consideration to the five-year rate moratorium when it set rates. This conflict between the one-year test year and the five-year order became apparent when the Commission had to determine whether all, part, or none of the units were used and useful under section 9-212. Only used and useful units may be included in the rate base of a utility. One of Staff's expert witnesses, Michael Gorman, testified that, based on the 1987 test year, 48% of Byron Unit 2 and 21% of Braidwood Unit 1 were used and useful. Although the Commission reiterated the testimony of the numerous witnesses presented by Staff, the intervenors and Edison on the used and useful issue, the Commission only appeared to take stock in Gorman's analysis. The Commission, however, rejected Gorman's findings, stating: The facts of the case now before the Commission are the facts of Staff's Offer of Settlement. Under its Offer of Settlement, Staff no longer submits that Mr. Gorman's methodology is appropriate. Staff presented Mr. Gorman's methodology in the context of a one year rate case and still argues that it could be appropriate in the context of a one year rate case, depending on the circumstances involved. However, it is Staff's position that Mr. Gorman's methodology is not appropriate in the context of Staff's Offer of Settlement which establishes a five-year rate moratorium. Staff points out that while the Commission has broad discretion to make used and useful determinations, the reasonable exercise of that discretion depends on the circumstances at hand. Staff concludes that it is clearly appropriate under pre-1986 law to find Byron Unit 2 and Braidwood Unit 1 used and useful under the terms of the Offer of Settlement.    The Commission concurs with Staff that the used and useful disallowances proposed by Mr. Gorman are not appropriate under the terms of the offer of Settlement. While Mr. Gorman's methodology looked only at the 1987 test year, Mr. Gorman testified that Byron Unit 2 and Braidwood Unit 1 are needed to meet demand and provide economic benefits beyond the 1987 test year. Also, it is inherent in Mr. Gorman's methodology that a utility could present a rate case each year to ratebase more of its generating facility as used and useful as demand and economic benefits increase under the application of Mr. Gorman's methodology. Under Staff's Offer of Settlement, the Commission is setting rates for five years. Edison will not be allowed to file for an increase in rates during that period. Under the terms of the Offer of Settlement, it is not appropriate to impose used and useful disallowances based upon a one-year analysis due to the nature of the five-year moratorium. The Commission then found within the context of the Offer of Settlement all of Byron Unit 2 and Braidwood Unit 1 were used and useful: Thus, there is no question that a determination that Byron Unit 2 and Braidwood Unit 1 are used and useful under the terms of the Offer of Settlement is a determination appropriate under pre-1986 law. The Commission makes no determination whether Byron Unit 2 and Braidwood Unit 1 would or would not be found to be used and useful under the terms of a traditional rate case   . Thus, the Commission adopted the 1987 test year, but did not use it to decide the used and useful issue. The Commission discounted Gorman's approach and based its decision to find all of the units used and useful on two circumstances. First, the Sixth Order encompassed a five-year period and Edison could not file for a rate increase during that period. Presumably, if the Commission found only part of the units used and useful, and a larger percentage of the units became used and useful over the next several years, Edison could not include in its rate base that additional percentage until after 1993. Consequently, the Commission found it inappropriate to impose used and useful disallowances based upon a one-year analysis due to the nature of the five-year moratorium. For this reason, the Commission found that within the context of the Offer of Settlement all of the units were used and useful. Second, the Commission based its decision on its discretion to make used and useful determinations under pre-1986 law. The Commission stated in the Sixth Order that it was consistent with the Commission's reasonable exercise of discretion under pre-1986 law not to impose used and useful disallowances under the circumstances. Under section 9-215, if the units were already under construction prior to 1986, the effective date of the new Act, any determination of whether the units are used and useful must be made under the law in effect prior to 1986. (Ill. Rev. Stat. 1987, ch. 111 2/3, par. 9-215.) Byron Unit 2 and Braidwood Unit 1 were under construction prior to 1986. The Commission, therefore, correctly determined it had to decide the used and useful issue based on pre-1986 law. Prior to 1986, however, the Act did not define used and useful. After reviewing pre-1986 common law, the Commission found the units used and useful because the units were in service, [were] in round-the-clock daily use, [were] base loaded and economically dispatched, and [were] producing substantial fuel savings. Even if the Commission had discretion under pre-1986 law to determine what portion, if any, of the units was used and useful, the Commission still based part of its decision on the five-year scope of the Sixth Order and the rate moratorium. Moreover, the Commission did not cite the testimony of any witness to support its finding the units 100% used and useful in the first year and throughout the five-year period. Edison presented the testimony of witnesses to support its position that the units were used and useful. The Commission did not state that it based its decision on the testimony presented by Edison. Instead, the Commission only relied on Gorman's testimony, but it then disagreed with his testimony. Thus, the Commission failed to support its decision with any credible evidence; that is, any evidence other than the circumstances of the Settlement and its own discretion. The Commission also failed to adopt an alternative approach. In other words, the Commission did not want to base its decision on the test year, but it did not articulate a new standard upon which to evaluate the used and useful issue. The Commission simply considered the five-year scope of the Sixth Order and relied on its discretion under pre-1986 law. Commissioner Stone, who dissented in part from the Sixth Order, asserted that Gorman's methodology was rational and reasonable. Nevertheless, Stone acknowledged the difficulty in predicting whether and to what extent a unit was used and useful over five years based on a one-year standard. Stone, however, pointed out that the Commission failed to adopt any alternative to the Gorman approach. Stone stated: [H]aving rejected Gorman's single test year determination, there were other alternatives available from the record, had the Commission wished to use them. Most notably, Morris Brubaker, on behalf of IIEC, developed the basis for a five-year phase-in of Braidwood 1.    To preserve Gorman's approach and apply an appropriate used and useful standard for the five year period of the Offer of Settlement, Gorman's methodology could have been combined with the 2% load growth analysis of Brubaker. Under Brubaker's analysis, Braidwood 1 would become 100% used and useful in the last year of the moratorium. (1988: 21% used and useful, 1989: 40%, 1990: 60%, 1991: 80%, 1992: 100%) Determining in advance to phase in Braidwood 1 over five years in increments when the reserve margin was expected to fall below 20% would have set a standard  and an appropriate one  for used and useful in the context of the Offer of Settlement. While such an approach could create problems in Step 2, it would have had the advantage of greater intellectual honesty. It  or a variation of it  would have adopted and adhered to an understandable standard, supported in the record. It would also have provided a basis for future Commission decisions. Here it is well worth quoting Staff's position on page 9 of its Brief on Exceptions to this Order: `In their briefs, [the State] and BPI    take exception to the Examiner's resolution of the used and useful issue. Staff agrees with these exceptions to the extent that they argue that an explicit standard should be set forth. There were a number of standards proposed by the various witnesses. Mr. Gorman used a 1 year standard; Mr. Brubaker used a 5 year standard; Mr. Wayland proposed a 10 year standard; and Edison advocated use of an `economic dispatch' standard. While Staff believes that its one year standard is most appropriate for rate orders which will be in effect for only about a year, longer term standards may be more appropriate for rates which are proposed to be in effect for five years. Thus, either Mr. Brubaker's or Mr. Wayland's standard would be appropriate.' The Order chooses not to apply any transferrable standard in deciding that Byron 2 and Braidwood 1 are used and useful   . Under certain circumstances, the Commission may have authority to establish rates over a five-year period. The Act does not explicitly limit the authority of the Commission in this regard. In addition, the Act permits the Commission to adopt a rate moderation plan which is designed to diminish the immediate rate impact of the inclusion of a new facility in the rate base. (Ill. Rev. Stat. 1987, ch. 111 2/3, par. 9-217.) As we indicated earlier, however, the Commission cannot impose a rate moratorium upon a utility during that period without the agreement of the utility. Nevertheless, we need not decide here whether or under what circumstances the Commission could set long-term rates because circumstances justifying the establishment of rates over a five-year period clearly do not exist in the case at bar. The established past practice of the Commission was to set rates on a year-to-year basis. (See Commonwealth Edison Co. v. Illinois Commerce Comm'n (1989), 180 Ill. App.3d 899, 908 (The accepted practice of the Commission is to set rates through use of a 12-month measuring period).) General Order 210, a rule adopted by the Commission, is an explicit example of this practice. In the case at bar, the Commission adopted a single test year, 1987, as required by General Order 210, but then, when deciding certain issues such as whether the units were used and useful, refused to rely on testimony based on this test year. The Commission admitted when it adopted the 1987 test year and when it decided the used and useful issue that it had to consider circumstances outside the test-year data; that is, the five-year length of the Sixth Order and the rate moratorium. The Commission thus appeared to establish a new test-year or test-period standard which would apply to cases where the Commission set rates over more than one year. The Commission, however, never clearly articulated such a standard. The Commission just considered these other circumstances. The Commission may alter or amend its past practice, but it must follow the procedures set forth in its rules and the Act. Section 10-101 of the Act provides: Any proceeding intended to lead to the establishment of policies, practices, rules or programs applicable to more than one utility may    be conducted pursuant to    contested case provisions, provided such choice is clearly indicated at the beginning of such proceeding and subsequently adhered to. (Ill. Rev. Stat. 1987, ch. 111 2/3, par. 10-101.) The Commission could have set a new standard of procedure in the Sixth Order pursuant to section 10-101. The Commission also could have added a new rule, or amended General Order 210, to establish a new test year or test period for cases which would set rates for more than one year. Instead, the Commission adopted the one-year test-year standard, but used its discretion to consider circumstances outside the test year in deciding particular issues. The Commission had to either abide by the 1987 test-year standard or set an articulable alternative standard which the parties and intervenors could follow and on which the parties and intervenors could present evidence; the Commission did neither. If the Commission set forth a new standard in the Sixth Order, it did not establish exactly what circumstances or evidence would be relevant or admissible under that standard. The confusing standard and procedure used by the Commission left the parties and intervenors unable to discern what evidence to present or how to structure their arguments and positions on the various issues. The Commission also did not set a clearly identifiable alternative standard on which future cases would be based. For these reasons, the Commission violated its rules and the Act to the prejudice of the intervenors, and therefore committed reversible error. Ill. Rev. Stat. 1987, ch. 111 2/3, par. 10-201(e)(iv)(D). Moreover, the decision of the Commission to find all of the units used and useful was not supported by substantial evidence based on the entire record of evidence. (Ill. Rev. Stat. 1987, ch. 111 2/3, par. 10-201(e)(iv)(A).) Any order of the Commission must be based exclusively on the record. (Ill. Rev. Stat. 1987, ch. 111 2/3, par. 10-103.) As Commissioner Stone noted, the Commission had evidence on which to determine the used and useful issue, but the Commission chose to disregard this evidence. The Commission instead improperly relied on the circumstances of the Settlement. Consequently, the Commission committed reversible error. Ill. Rev. Stat. 1987, ch. 111 2/3, par. 10-201(e)(iv)(A). In the Sixth Order, the Commission referred to its broad jurisdictional authority    to reach a resolution. The Commission states in its brief that it can deal freely with each situation which comes before it, regardless of how it dealt with the same or a similar situation in the past; that is, it can make decisions on a case-by-case basis. ( Mississippi River Fuel Corp. v. Illinois Commerce Comm'n (1953), 1 Ill.2d 509, 513.) Edison contends nothing in the Act requires the Commission to adhere to a test year or precludes the Commission from considering matters outside the test year. Edison argues that in the past the Commission has allowed consideration of evidence outside the test year. Edison asserts that General Order 210 simply informs a utility of what data the utility must file with its rate request. (83 Ill. Adm. Code § 285.110 (1985).) General Order 210 does not bind the Commission to make a decision based solely on this data. (83 Ill. Adm. Code § 285.110 (1985).) Edison thus argues the test year is just a starting point and the Commission can still exercise its discretion. Edison also contends the refund mechanism in the Sixth Order will nevertheless protect ratepayers if the rates are too high. While some of these arguments may be true, the Commission cannot violate the Act or its own rules, both of which we have held the Commission did under the circumstances in the case at bar. We also note that no matter how much discretion the Commission is afforded under the Act, its decisions are entitled to less deference when it drastically departs from past practice. See Commonwealth Edison, 180 Ill. App.3d at 908. The intervenors cite specific examples of instances where the Commission improperly relied on evidence outside the test year to support its decision for a rate increase. For example, intervenors assert the Commission relied on 1988 data concerning the unseasonably hot summer and corresponding high electric demand. Again, Edison contends the Commission has discretion to consider such evidence. Part of the confusion in this regard stemmed from the failure of the Commission to set forth an identifiable test-year standard. We need not address these specific arguments here because upon remand the Commission will have to establish an appropriate test year or period in accordance with the Act and the rules of the Commission, and then reevaluate the evidence and arguments of the parties and intervenors. Any decision on our part would be premature, as the issue may not recur upon remand. The IIEC argues that the Sixth Order constitutes a rate moderation plan under section 9-217 of the Act. (Ill. Rev. Stat. 1987, ch. 111 2/3, par. 9-217.) While the purpose of the Sixth Order may be rate moderation, especially inasmuch as three new units are being added at one time to the rate base of Edison, the Commission cannot impose a rate moderation plan which violates the rules of the Commission or other provisions of the Act. Furthermore, although the phase-in of a single rate increase over a period of years may be considered a rate moderation plan, the Sixth Order is not a phase-in of a rate increase. Finally, we wish to point out that the act of the Commission in considering terms in the Sixth Order, such as the five-year rate moratorium, as a basis for altering the test-year standard reveals to us again the settlement rationale of the Sixth Order. The Commission realized Edison would be penalized by the moratorium, so to balance that aspect of the order, the Commission gave Edison leeway on the test-year data. We would not so readily come to this conclusion had the Commission set forth a new, articulable test-year standard based on the evidence. The ad hoc way in which the Commission used its discretion, however, leads us to conclude the Commission merely balanced the various issues between Edison and the ratepayers in the form of a settlement. We appreciate the effort of the Commission to resolve these rate issues over a five-year period, thus keeping rates constant. Under the circumstances, and for the reasons we have enumerated, however, we cannot approve or affirm the imposition by the Commission of this five-year order.