                                       2015 IL 116005



                                  IN THE
                             SUPREME COURT
                                    OF
                           THE STATE OF ILLINOIS



                                    (Docket No. 116005)

          THE PEOPLE ex rel. LISA MADIGAN et al., Appellants, v. ILLINOIS
                  COMMERCE COMMISSION et al., Appellees.


                               Opinion filed January 23, 2015.



        JUSTICE THEIS delivered the judgment of the court, with opinion.

        Chief Justice Garman and Justices Freeman, Thomas, Kilbride, Karmeier, and
     Burke concurred in the judgment and opinion.



                                          OPINION

¶1       Peoples Gas Light and Coke Company (Peoples Gas) and North Shore Gas
     Company (North Shore Gas) serve millions of residential and commercial customers in
     the Chicagoland area. The companies not only sell natural gas, but also deliver it
     through their lines. Thus, the companies’ operating costs include the costs of the gas
     itself and the costs of the gas distribution. This case involves distribution costs, and a
     ratemaking proceeding that resulted in a change as to how the companies recover those
     costs.

¶2       The central issue is whether the Illinois Commerce Commission (Commission)
     abused its discretion when it approved a volume-balancing-adjustment rider, or Rider
     VBA, which imposed so-called “revenue decoupling” on the companies’ customers. In
     2008, the Commission approved a similar rider as a four-year pilot program. In 2012,
     the Commission approved the rider on a permanent basis. The Attorney General and
     the Citizens Utility Board (CUB) challenged that decision, and the appellate court
     affirmed it. 2013 IL App (2d) 120243.

¶3       For the reasons that follow, we agree with the appellate court and likewise affirm
     the Commission’s decision.



¶4                                    BACKGROUND

¶5      The Public Utilities Act (Act) opens with a statement of intent:

            “The General Assembly finds that the health, welfare and prosperity of all
            Illinois citizens require the provision of adequate, efficient, reliable,
            environmentally safe and least-cost public utility services at prices which
            accurately reflect the long-term cost of such services and which are equitable to
            all citizens. It is therefore declared to be the policy of the State that public
            utilities shall continue to be regulated effectively and comprehensively.” 220
            ILCS 5/1-102 (West 2010).

     One of the stated goals of such regulation is efficiency, or “the provision of reliable
     energy services at the least possible cost to the citizens of the State.” 220 ILCS
     5/1-102(a) (West 2010).

¶6        The Act creates the Illinois Commerce Commission, the administrative agency
     responsible for setting rates that public utilities may charge their customers. 220 ILCS
     5/2-101 (West 2010); People ex rel. Hartigan v. Illinois Commerce Comm’n, 148 Ill.
     2d 348, 366 (1992). Under the Act, all rates and charges by public utilities, as well as
     all rules and regulations pertaining to those charges, must be “just and reasonable.” 220
     ILCS 5/9-101 (West 2010). A public utility may not alter its rates and charges, unless it
     provides notice to the Commission and the public by, inter alia, filing with the
     Commission a new “schedule” describing any proposed changes. 220 ILCS 5/9-201(a)
     (West 2010). When the Commission receives a new schedule, it may conduct “a
     hearing concerning the propriety” of the changes, and the changes are suspended for
     some time pending the outcome of that hearing. 220 ILCS 5/9-201(b) (West 2010). The
     Act further provides:

               “(c) If the Commission enters upon a hearing concerning the propriety of
            any proposed rate or other charge, classification, contract, practice, rule or
            regulation, the Commission shall establish the rates or other charges,
                                             -2-
            classifications, contracts, practices, rules or regulations proposed, in whole or
            in part, or others in lieu thereof, which it shall find to be just and reasonable. In
            such hearing, the burden of proof to establish the justness and reasonableness of
            the proposed rates or other charges, classifications, contracts, practices, rules or
            regulations, in whole and in part, shall be upon the utility. *** No rate or other
            charge, classification, contract, practice, rule or regulation shall be found just
            and reasonable unless it is consistent with Sections of this Article.” 220 ILCS
            5/9-201(c) (West 2010).

¶7        In establishing rates, the Commission initially must determine the utility’s
     “revenue requirement.” Business & Professional People for the Public Interest v.
     Illinois Commerce Comm’n (BPI II), 146 Ill. 2d 175, 195 (1991). The Act
     acknowledges “utilities are allowed a sufficient return on investment so as to enable
     them to attract capital in financial markets at competitive rates,” and it authorizes
     public utility rates for various services that “accurately reflect the cost of delivering
     those services and allow utilities to recover the total costs prudently and reasonably
     incurred.” 220 ILCS 5/1-102(a)(iii), (iv) (West 2010). As we have explained:

            “A public utility is entitled to recover in its rates certain operating costs. A
            public utility is also entitled to earn a return on its rate base, or the amount of its
            invested capital; the return is the product of the allowed rate of return and rate
            base. The sum of those amounts—operating costs and return on rate base—is
            known as the company’s revenue requirement. The components of the
            ratemaking determination may be expressed in ‘the classic ratemaking formula
            R (revenue requirement) = C (operating costs) + Ir (invested capital or rate base
            times rate of return on capital).’ [Citation.] The same formula is used by the
            Commission in ratemaking determinations for Illinois.” Citizens Utilities Co. of
            Illinois v. Illinois Commerce Comm’n, 124 Ill. 2d 195, 200-01 (1988).

¶8       In the context of natural gas, the “C” in that equation, operating costs, includes
     distribution costs. To some extent, those costs are fixed. Utility companies incur them
     regardless of the volume of gas that they deliver because they must be prepared to
     provide adequate, reliable, and safe service. Traditionally, however, volume has played
     a major role in setting gas rates, and companies have recovered part of their distribution
     costs through “volumetric distribution charges” based on statistical forecasts of the
     amount of gas their customers will use. The forecasts, in turn, rest upon several
     variables, some of which are wildly unpredictable like the weather. Consequently, gas


                                              -3-
       companies have recovered more than their fixed distribution costs when demand for
       gas has been high, and less than that when it has been low.

¶9          In 2007, Peoples Gas and North Shore Gas petitioned the Commission to approve
       Rider VBA. “A rider is a cost recovery method. It generally alters an otherwise
       applicable rate and recovers a specific cost under particular circumstances. *** [A
       rider] often include[s] a reconciliation formula, designed to match revenue recovery
       with actual costs.” Citizens Utility Board v. Illinois Commerce Comm’n, 166 Ill. 2d
       111, 133 (1995); see Central Illinois Light Co. v. Illinois Commerce Comm’n, 255 Ill.
       App. 3d 876, 883 (1993). Rider VBA was designed with not only revenue recovery, but
       also revenue disgorgement, in mind. That is, Rider VBA prevents under-recovery of
       fixed distribution costs, as well as over-recovery of them, by “decoupling” the revenue
       for those costs that the companies receive from the volume of gas that they deliver.
       Revenue decoupling essentially maintains a utility company’s revenue at or around the
       revenue requirement. If actual revenues dip below a level set by the Commission due to
       decreased delivery volume, the company issues customers a surcharge for the
       difference. If revenues tick above that level due to increased delivery volume, the
       company issues customers a credit. See Sandy Glatt & Myka Dunkle, Natural Gas
       Revenue Decoupling Regulation: Impacts on Industry (U.S. Dep’t of Energy July
       2010). That approach removes forecasts, and the inevitable inaccuracies that
       accompany them, from the calculation of costs and ensures that the company recovers
       its revenue requirement. Revenue decoupling is not a new approach to ratemaking, but
       it has garnered increased attention from utilities and regulators, particularly in states
       concerned with greenhouse gas emissions, because it removes incentives for utilities to
       deemphasize energy efficiency and to spur demand. Id.

¶ 10       The Commission held a hearing on the companies’ petition and issued a 320-page
       order on February 5, 2008, in which it approved Rider VBA as a four-year pilot
       program with monthly adjustments. See In re North Shore Gas Co., 2008 WL 631214.
       The Attorney General filed an appeal from the Commission’s decision. 1 While that
       appeal was pending, and time on the pilot program was waning, the companies
       petitioned to make Rider VBA permanent. The Commission held another hearing and
       issued a 239-page order on January 12, 2012, in which it approved Rider VBA on a
       permanent basis. 2 In its order, the Commission set out the positions of the companies,

           1
            When Rider VBA became permanent, the parties asked the appellate court to dismiss that appeal as
       moot. That motion was granted. See People ex rel. Madigan v. Illinois Commerce Comm’n, No.
       2-11-0380 (2012) (minute order).
           2
            The Commission also awarded Peoples Gas an 11% increase in its revenue requirement and North
                                                    -4-
       its own staff, and the Attorney General. It then set out its analysis and conclusions. The
       Commission initially noted that under the pilot program the companies issued refunds
       totaling more than $28 million. That program was intended to address “the reality of
       fixed costs against a backdrop of a diminishing customer base and resulting revenue
       losses as well as revenue losses attributable to the implementation of aggressive energy
       efficiency programs.”

¶ 11       According to the Commission, there were several reasons to make Rider VBA
       permanent. First, it is a “a symmetrical and transparent formula for collecting the
       approved distribution revenue requirements—not more or less—from customers if the
       Commission chooses not to provide fully for recovery of fixed costs through fixed
       charges.” Second, Rider VBA reduces reliance on forecasts, which the Commission
       called “inevitably incorrect each year” and “only correct on average.” Relatedly, Rider
       VBA protects customers if utilities choose a forecast that underestimates sales volumes
       and yields a higher rate that unjustifiably boosts their revenues and profits. With Rider
       VBA, such a forecast will not increase profits because any over-collection would be
       refunded.

¶ 12       The Commission also discussed energy efficiency, noting that was not the sole, or
       even the main reason to approve the pilot program. Its rationale, instead, was
       “multi-faceted” and focused on all the benefits offered by revenue decoupling.
       Decoupling corrects for so-called “load changes,” or changes in the volume of natural
       gas coursing through a utility’s lines. Energy efficiency initiatives, including section
       8-104 of the Act (220 ILCS 5/8-104 (West 2010)), may result in a diminished load.
       “Decoupling,” observed the Commission, “will take the effects of efficiency into
       account together with other factors, notably weather, that affects load and promote
       distribution rate stability for customers and the [companies].”

¶ 13       The Commission stated that the pilot program operated as expected, stabilizing the
       companies’ revenues, while ensuring that customers neither over- nor under-paid the
       approved revenue requirements. The Commission voiced its support for “increased
       recovery of fixed costs through fixed charges,” but settled on decoupling rather than
       another alternative rate design. The Commission concluded “there has been a
       compelling and sufficient showing that a permanent Rider VBA is reasonable and
       justified.”


       Shore Gas a 2.5% increase in its revenue requirement. That portion of the Commission’s order is not
       before us in this appeal.
                                                   -5-
¶ 14       The Attorney General and CUB filed applications for rehearing. CUB challenged,
       inter alia, the Commission’s decision to approve Rider VBA on two grounds. CUB
       asserted that the rider was unnecessary because the conditions that justified the pilot
       program, including higher gas prices and mandated energy efficiency programs that
       were predicted to lower both demand and delivery volume, no longer exist. CUB
       further asserted the rider violated a rule developed in case law from this court against
       so-called single-issue ratemaking. The Attorney General also challenged the
       Commission’s decision on two grounds. Like CUB, the Attorney General asserted that
       the rider violates the rule against single-issue ratemaking. The Attorney General also
       asserted that Rider VBA was inconsistent with the regulatory framework established in
       the Act. See 220 ILCS 5/9-201 (West 2010). Neither the Attorney General nor CUB
       contended that Rider VBA constituted impermissible retroactive ratemaking. The
       Commission rejected their arguments, and they sought review by the appellate court.
       See 220 ILCS 5/10-201(a) (West 2010).

¶ 15       The appellate court affirmed. 2013 IL App (2d) 120243. The Attorney General and
       CUB generally challenged the validity of Rider VBA, contending that it violates
       prohibitions against retroactive and single-issue ratemaking. Regarding retroactive
       ratemaking, the appellate court initially rejected a forfeiture argument raised by the
       Commission and the companies. Id. ¶ 21. The court acknowledged that the Attorney
       General and CUB failed to raise that issue in their applications for rehearing before the
       Commission, as required by section 10-113(a) of the Act (220 ILCS 5/10-113(a) (West
       2010)) to obtain judicial review of an agency decision, but excused that omission
       because the issue was addressed by the Commission in its 2008 order and because
       “forfeiture is a limitation on the parties and not on the jurisdiction of [the] court.” 2013
       IL App (2d) 120243, ¶ 21. On the merits, the court noted that although rates based on
       revenue decoupling differ from traditional rates, the legal principles governing them,
       including the rule against retroactive ratemaking, remain the same. Id. ¶ 24. That is,
       once the Commission approves a ratemaking plan, it cannot later modify that plan to
       correct an error. Id. According to the appellate court, the Commission did not correct
       any error when it approved Rider VBA. Id. “Rather, the Commission approved a
       design, which involved fixed and reasonable amounts of revenues for the [companies]
       and which involved a later true-up calculation based on actual sales. This two-tiered
       design was approved only once by the Commission and was not later modified.” Id.
       Thus, the rider did not constitute retroactive ratemaking. Id.

¶ 16      Regarding single-issue ratemaking, the appellate court stated that Commonwealth
       Edison Co. v. Illinois Commerce Comm’n, 405 Ill. App. 3d 389, 411 (2010) held that
                                            -6-
       riders are by nature methods of single-issue ratemaking, so they are unlawful absent a
       showing of exceptional circumstances. 2013 IL App (2d) 120243, ¶ 27 (citing A. Finkl
       & Sons Co. v. Illinois Commerce Comm’n, 250 Ill. App. 3d 317, 327 (1993)). The
       appellate court, however, reemphasized that revenue decoupling is a different rate
       design from traditional ratemaking, so Rider VBA is unlike the riders discussed in
       Commonwealth Edison. Id. ¶ 28. The appellate court declined “to categorically find
       that Rider VBA is a method of single-issue ratemaking” because it does not isolate or
       provide for the recovery of any specific cost. Id. Instead, the rider accounts for only
       those costs approved by the Commission as part of its calculation of the revenue
       requirements. Id. The appellate court continued:

                  “The Utilities invested significant resources into the critical infrastructure
              necessary to distribute natural gas to customers’ homes and businesses. This
              investment was approved long ago by the Commission. We conclude that the
              revenue decoupling mechanism known as Rider VBA was approved by the
              Commission to guarantee that the Utilities recoup the costs for the
              infrastructure in which they prudently invested, not to ensure profits but to
              satisfy the distribution needs of their customers.” Id. ¶ 29.

       Thus, it did not constitute single-issue ratemaking. Id. ¶ 30.

¶ 17       We allowed a petition for leave to appeal from the Attorney General and CUB. Ill.
       S. Ct. R. 315(a) (eff. July 1, 2013). We also allowed Ameren Illinois Company,
       American Gas Association, and Northern Illinois Gas Company leave to file separate
       amicus curiae briefs in support of the Commission and the companies. Ill. S. Ct. R. 345
       (eff. Sept. 20, 2010).



¶ 18                                       ANALYSIS

¶ 19       In this appeal, the Attorney General and CUB raise what they indicate is a sole
       broad issue: “whether Rider VBA is lawful.” They contend it is not for three reasons.
       First, they argue that Rider VBA departs from “principles of rate-of-return regulation,”
       specifically the principle that a just and reasonable rate under the Act provides only an
       opportunity for, and not a guarantee of, a profit. Second, they argue that Rider VBA
       constitutes impermissible single-issue ratemaking. Third, they argue that Rider VBA
       constitutes impermissible retroactive ratemaking. Before we address these arguments,


                                               -7-
       we must address another argument that bears on them all, the proper standard of
       review.

¶ 20       The Act governs the Commission (see People ex rel. Hartigan v. Illinois
       Commerce Comm’n, 148 Ill. 2d 348, 366-67 (1992)), but it also governs the courts, and
       their review of the Commission’s decisions. Section 10-201(e)(iv) of the Act provides:

                 “(iv) The court shall reverse a Commission rule, regulation, order or
              decision, in whole or in part, if it finds that:

                         A. The 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; or

                          B. The rule, regulation, order or decision is without the jurisdiction
                  of the Commission; or

                          C. The rule, regulation, order or decision is in violation of the State
                  or federal constitution or laws; or

                          D. The proceedings or manner by which the Commission
                  considered and decided its rule, regulation, order or decision were in
                  violation of the State or federal constitution or laws, to the prejudice of the
                  appellant.” 220 ILCS 5/10-201(e)(iv) (West 2010).

       See Citizens Utility Board v. Illinois Commerce Comm’n, 166 Ill. 2d 111, 120-21
       (1995).

¶ 21       Here, the Attorney General and CUB do not contend that the Commission lacked
       jurisdiction or violated their constitutional or statutory rights. They also do not argue
       that the Commission failed to support its decision with substantial evidence. The sole
       issue before us, then, is simply whether that decision violated the Act.

¶ 22        Section 10-201(d) of the Act states that any decision by the Commission is “prima
       facie reasonable” (220 ILCS 5/10-201(d) (West 2010)), so a party challenging such a
       decision bears the burden of proof to show it is unreasonable. Thus, in an appeal like
       this one, our authority is deferential by statute, but it is also by nature. Simply put, we
       are judges, not utility regulators. Though we are free to disagree with the Commission
       on what the Act means (Business & Professional People for the Public Interest v.
       Illinois Commerce Comm’n (BPI I), 136 Ill. 2d 192, 204 (1989)), we remain hesitant to

                                                -8-
       disregard how the Commission applies it (see Illinois Consolidated Telephone Co. v.
       Illinois Commerce Comm’n, 95 Ill. 2d 142, 152 (1983)). The Commission’s
       interpretation of the Act is accorded deference because administrative agencies enjoy
       wide latitude in effectuating their statutory functions. Commonwealth Edison Co. v.
       Illinois Commerce Comm’n, 398 Ill. App. 3d 510, 514 (2009) (quoting Illinois
       Consolidated Telephone Co. v. Illinois Commerce Comm’n, 95 Ill. 2d 142, 152
       (1983)); Alhambra-Grantfork Telephone Co. v. Illinois Commerce Comm’n, 358 Ill.
       App. 3d 818, 821 (2005); cf. Church v. State, 164 Ill. 2d 153, 161-62 (1995) (“Where
       the legislature expressly or implicitly delegates to an agency the authority to clarify and
       define a specific statutory provision, administrative interpretations of such statutory
       provisions should be given substantial weight unless they are arbitrary, capricious, or
       manifestly contrary to the statute.”).

¶ 23       Deference to the Commission is “especially appropriate in the area of fixing rates.”
       Iowa-Illinois Gas & Electric Co. v. Illinois Commerce Comm’n, 19 Ill. 2d 436, 442
       (1960); accord United Cities Gas Co. v. Illinois Commerce Comm’n, 163 Ill. 2d 1, 12
       (1994). As we recognized in Villages of Milford v. Illinois Commerce Comm’n, 20 Ill.
       2d 556, 561 (1960), “the determination of rates is not a matter of formulas but one of
       sound business judgment,” which the General Assembly has entrusted to the
       Commission, and not to the courts. See Cerro Copper Products v. Illinois Commerce
       Comm’n, 83 Ill. 2d 364, 371 (1980); City of Chicago v. Illinois Commerce Comm’n,
       281 Ill. App. 3d 617, 622 (1996) (“Matters of rate regulation are of legislative character
       and courts should not interfere with the functions and authority of the Commission so
       long as its order demonstrates sound and lawful analysis.”). A rate is more than a
       number; it is also a design. The Commission’s decision in a rate case does not involve
       simply what utilities may charge their customers, but how they do so. See generally
       City of Chicago v. Illinois Commerce Comm’n, 13 Ill. 2d 607, 611 (1958) (“the
       statutory authority to approve rate schedules embraces more than the authority to
       approve rates fixed in terms of dollars and cents”). And that decision depends largely
       upon the Commission’s experience and expertise in its field. See Central Illinois
       Public Service Co. v. Illinois Commerce Comm’n, 243 Ill. App. 3d 421, 445 (1993)
       (“Because of its complexity and need to apply informed judgment, rate design is
       uniquely a matter for the Commission’s discretion.”).

¶ 24       Accordingly, the Attorney General and CUB, as appellants, face an uphill battle to
       overturn the Commission’s 2012 order. Recognizing this, they insist that our review
       should be nondeferential. They acknowledge that we have held the Commission has
       discretion to approve riders (see City of Chicago, 13 Ill. 2d at 614), but they assert the
                                               -9-
       Commission may exercise that discretion only in “exceptional circumstances”
       (Commonwealth Edison, 405 Ill. App. 3d at 411). They add that where the Commission
       drastically departs from past practice by violating the Act or its own rules, its decision
       is entitled to less deference. See BPI I, 136 Ill. 2d at 228. They go further, concluding
       that, because the sole issue here is whether Rider VBA complies with the Act, and that
       issue involves statutory construction, the Commission’s decision is entitled to no
       deference at all.

¶ 25       We reject these various points. The reference to “exceptional circumstances” in
       Commonwealth Edison has no tether to our case law, and even that court frankly
       recognized that “the Commission has the power to authorize a rider in a proper case and
       such authorization will not be reversed absent an abuse of discretion.” Commonwealth
       Edison, 405 Ill. App. 3d at 411. Additionally, “only where the Commission departs
       from its usual rules of decision to reach a different, unexplained result in a single case,
       thus depriving a party of equal treatment before the Commission, will its decision be
       entitled to less deference on review.” (Internal quotation marks omitted.) Abbott
       Laboratories, Inc. v. Illinois Commerce Comm’n, 289 Ill. App. 3d 705, 715 (1997). The
       Commission drastically departed from past practice in BPI I by disregarding the
       so-called “test-year rule” contained in the Act and its accompanying regulations. Here,
       however, there was nothing in the process of approving Rider VBA that violated the
       Act or any regulations. Finally, the sole issue here does not involve statutory
       construction. We are not asked to interpret the Act, but rather to judge whether the
       Commission, in determining that Rider VBA was part of a just and reasonable rate,
       abused its discretion. On that point, as we have stated, the Commission is entitled to
       substantial deference. We turn to the main arguments raised by the Attorney General
       and CUB.



¶ 26                               1. Rate-of-Return Principles

¶ 27       The Attorney General and CUB first argue that the Commission’s decision was
       contrary to what they call “rate-of-return principles” memorialized in the Act. They
       assert that Rider VBA, in its attempt to make under-recovery of the companies’
       revenue requirements less likely, “alters the nature of utility rate-of-return regulation
       and the concept of ‘just and reasonable rates’ under the Act.” They contend that a just
       and reasonable rate does not provide a utility with a guarantee of net revenue. See
       Federal Power Comm’n v. Hope Natural Gas Co., 320 U.S. 591, 603 (1944). Rather,

                                               - 10 -
       such a rate provides the utility with an opportunity for necessary revenue, if properly
       managed. See Bluefield Waterworks & Improvement Co. v. Public Service Comm’n,
       262 U.S. 679, 693 (1923).

¶ 28       According to the Attorney General and CUB, a just and reasonable rate under the
       Act should approximate the rate that would result in a free market. See Illinois Power
       Co. v. Illinois Commerce Comm’n, 339 Ill. App. 3d 425, 434 (2003) (quoting State
       Public Utilities Comm’n ex rel. City of Springfield v. Springfield Gas & Electric Co.,
       291 Ill. 209, 218 (1919)). Rider VBA purportedly undermines that approach because it
       insures a certain level of revenue for the companies, and “includes an assumed profit
       level,” thereby removing any incentive to operate efficiently. They note that if the
       companies feel that the revenue requirement is insufficient, they can always file a
       petition for a rate increase under the Act. See 220 ILCS 5/9-201 (West 2010).

¶ 29       We reject this argument for two reasons. The Attorney General and CUB
       misperceive the purpose of a revenue requirement, and of Rider VBA. Certainly, as the
       Attorney General and CUB note, the Commission must design and set “just and
       reasonable” rates for “least-cost public utility services.” 220 ILCS 5/1-102 (West
       2010). It does this under the rate-of-return principles at the core of the Act, which do
       attempt to duplicate competition. See also National Rural Telecom Ass’n v. Federal
       Communications Comm’n, 988 F.2d 174, 178 (D.C. Cir. 1993) (“As one virtue of
       perfect competition is that it drives prices down to cost, rate-of-return regulation seems
       on its face a promising way to regulate natural monopolies, in principle roughly
       duplicating the benefits of competition.”).

¶ 30       Those principles factor both a recovery of prudent and reasonable costs and a return
       on equity into the equation used to determine the revenue requirement. See 220 ILCS
       5/1-102(a)(iii), (iv) (West 2010); Illinois Bell Telephone Co. v. Illinois Commerce
       Comm’n, 203 Ill. App. 3d 424, 428 (1990) (“The traditional method of setting rates ***
       begins with the threshold determination of what constitutes a reasonable return on
       equity (ROE) for the utility; rates are then set at levels designed to produce the target
       ROE.”). If the revenue requirement is “the amount the company is permitted to recover
       from its customers in the rates it charges” (Citizens Utilities, 124 Ill. 2d at 201), the
       company is entitled to that return. So a rate design that allows a utility company to
       recover its revenue requirement does not guarantee a profit any more than the revenue
       requirement itself does.



                                               - 11 -
¶ 31       Further, and more importantly, the Attorney General and CUB conflate the two
       steps of the ratemaking process. As the companies explain in their brief, the
       Commission first determines a utility company’s revenue requirement, which includes
       fixed costs and a reasonable return on equity, then designs a rate that allows the
       company to recover that revenue from its customers as accurately as possible. See
       Governor’s Office of Consumer Services v. Illinois Commerce Comm’n, 220 Ill. App.
       3d 68, 72 (1991); Amax Zinc Co. v. Illinois Commerce Comm’n, 124 Ill. App. 3d 4, 11
       (1984). Here, there is no dispute over the Commission’s calculation of the revenue
       requirement. There is only a dispute over the Commission’s choice of the mechanism
       by which the companies recover that figure. And, to repeat, that decision is entitled to
       substantial deference.

¶ 32       The Commission stated that Rider VBA is a “symmetrical and transparent formula”
       that, like all rate designs, seeks to accurately collect the revenue requirement. Rider
       VBA does not ensure net profits or even net revenue; it ensures recovery of the revenue
       requirement, as determined by the Commission and not challenged by the Attorney
       General and CUB. Before Rider VBA, the companies recovered their fixed distribution
       costs through volumetric charges, which meant that the revenue they collected from
       those charges was either higher or lower than the revenue requirement, depending on
       how much gas that their customers used. Such a rate design created perverse incentives
       for the companies to increase demand or under-forecast usage. The former is contrary
       to section 8-104(a) of the Act. See 220 ILCS 5/8-104(a) (West 2010). The latter is
       contrary to the Act’s goal of least-cost rates. See 220 ILCS 5/1-102(a) (West 2010).
       Rider VBA accepts the revenue requirement and offers a way for the companies to
       recover it—no more or less—via the annual true-up calculation. See 2013 IL App (2d)
       120243, ¶ 15 (“revenue decoupling allows a rate to fluctuate around a fixed level of
       revenues”). Under this rider, the amount of revenue that the company can recover is
       capped, regardless of its actual costs. If those costs increase beyond the amounts used
       to calculate the revenue requirement, the companies’ profits will decrease. Rider VBA
       does not allow them to earn more than that to which they are already entitled. It does,
       however, encourage them to manage their business effectively, so the revenue
       requirement not only covers their costs, but also ultimately provides a reasonable
       return.

¶ 33      Accordingly, as the Commission noted, the rider was intended to benefit both the
       companies and their customers. The rider helps the companies bridge the increasingly
       problematic disconnect between their fixed costs and their revenue losses due to a
       diminishing customer base and aggressive energy efficiency programs. It also guards
                                            - 12 -
       the customers against the negative effects of inevitably incorrect forecasting.
       Decoupling stabilizes both utility revenues and customer bills. The Commission called
       its rationale “appropriately multi-faceted.” See Cerro Copper, 83 Ill. 2d at 371 (noting
       that in designing a rate, “[m]any and complex factors must be considered”). Its decision
       to approve the rider as “reasonable and justified” was an exercise of sound business
       judgment, reached after a four-year pilot program that operated as expected and after a
       deliberative ratemaking process, in which the views of the companies, the Attorney
       General and CUB, and its own staff were voiced and considered. The Commission
       concluded that there was a “compelling and sufficient showing” that Rider VBA was
       “reasonable and justified.” Implicit in that ruling is a belief that the rider comported
       with the Act and rate-of-return principles. We cannot say that the Commission abused
       its discretion in approving it. 3



¶ 34                                   2. Single-Issue Ratemaking

¶ 35      The Attorney General and CUB next argue that the Commission’s decision to
       approve Rider VBA violates the rule against single-issue ratemaking. The Attorney
       General and CUB insist that riders, which provide direct recovery of unique costs, are a
       method of single-issue ratemaking, and, consequently, they are impermissible absent a
       showing of exceptional circumstances.

¶ 36       The rule against single-issue ratemaking is not expressly a part of the Act itself, but
       instead a creation of our case law. The rule emanates from the revenue formula that we
       mentioned earlier and:

               “recognizes that the revenue formula is designed to determine the revenue
               requirement based on the aggregate costs and demand of the utility. Therefore,
               it would be improper to consider changes to components of the revenue
               requirement in isolation. Oftentimes a change in one item of the revenue
               formula is offset by a corresponding change in another component of the
               formula.” (Emphasis omitted.) BPI II, 146 Ill. 2d at 244.

       Accord Commonwealth Edison, 405 Ill. App. 3d at 410 (“The rule ensures that the
       utility’s revenue requirement is based on the utility’s aggregate costs and the demand
           3
            We note that Illinois is not an outlier on revenue decoupling. According to amicus American Gas,
       there are currently 46 natural gas companies in 21 states, serving 28 million customers, that operate
       under a rate design involving decoupling.

                                                    - 13 -
       on the utility, rather than on certain specific costs related to a component of its
       operation.” (Emphasis omitted.)). The rule requires that the Commission must examine
       all the elements of the revenue formula to determine their interaction and the impact
       any change in one element will have on the utility’s revenue requirement. Citizens
       Utility Board, 166 Ill. 2d at 138. Consideration of only one item risks understatement or
       overstatement of the revenue requirement. Id. at 137; City of Chicago v. Illinois
       Commerce Comm’n, 281 Ill. App. 3d 617, 628-29 (1996) (“single issue ratemaking is
       prohibited because of the danger of ignoring some item which might have an impact on
       the overall revenue requirement”). Stated differently, an increase in one set of costs
       cannot alone support a rate increase.

¶ 37       The rule, however, does not apply “except in the context of a complete base rate
       proceeding,” where the Commission must balance costs against other, potentially
       offsetting changes in a utility’s ledger. Citizens Utility Board, 166 Ill. 2d at 137; see
       Archer-Daniels-Midland Co. v. Illinois Commerce Comm’n, 184 Ill. 2d 391, 401
       (1998). And the rule does not circumscribe the Commission’s power to approve
       recovery of such a cost through a rider when a utility faces unexpected or fluctuating
       expenses that are difficult to forecast. Citizens Utility Board, 166 Ill. 2d at 138; see also
       City of Chicago, 13 Ill. 2d at 614.

¶ 38        Here, the Attorney General and CUB largely ignore our statements in Citizens
       Utility Board, and rely instead upon those of the appellate court in Commonwealth
       Edison. There, the court stated, “Because a rider is a method of single-issue
       ratemaking, by nature, it is not allowed absent a showing of exceptional
       circumstances.” Commonwealth Edison, 405 Ill. App. 3d at 411. The appellate court
       cited A. Finkl & Sons Co. v. Illinois Commerce Comm’n, 250 Ill. App. 3d 317, 326
       (1993), but that case did not raise the level of scrutiny applied to riders, much less limit
       the Commission’s authority to approve them to instances where exceptional
       circumstances justify them. Indeed, A. Finkl is consistent with Citizens Utility Board
       because it noted that “[r]iders are useful in alleviating the burden imposed upon a
       utility in meeting *** volatile *** expenses.” (Emphasis omitted.) Id. at 327; see
       Central Illinois, 255 Ill. App. 3d at 885 (“we do not read Finkl as holding that the
       Commission does not have the authority to allow recovery of costs through riders”).

¶ 39       Further, in Citizens Utility Board, we did not label riders as methods of single-issue
       ratemaking. To the contrary, we indicated that they operate differently. Rather than
       isolating and controlling “a single-expense item” in the revenue formula, a rider
       “merely facilitates direct recovery of a particular cost, without direct impact on the
                                                - 14 -
       utility’s rate of return.” Citizens Utility Board, 166 Ill. 2d at 137-38; see also City of
       Chicago, 281 Ill. App. 3d at 629 (stating that the rider was “a reallocation which did not
       have any impact whatsoever on [the] overall revenue requirement”).

¶ 40       The Attorney General and CUB characterize Rider VBA’s sole purpose as a way to
       alter the companies’ “actual rate of return.” They are incorrect. A utility company’s
       revenue requirement is the sum of its operating costs and its return on equity or rate
       base. See Citizens Utilities, 124 Ill. 2d at 200-01. Its return on rate base is the product of
       its rate base and its allowed rate of return. Id. And its rate of return is set by the
       Commission at the initial step of the ratemaking process, determining the revenue
       requirement. Rider VBA has no effect on the companies’ rate of return, just like it has
       no effect on their revenue requirement. As we have stated, Rider VBA accepts the
       revenue requirement and provides a mechanism to recover it accurately. If the rider has
       no impact on the revenue requirement, it poses no risk of distorting the ratemaking
       process. Accordingly, we hold that Rider VBA does not constitute single-issue
       ratemaking and the Commission did not abuse its discretion in approving it.



¶ 41                                 3. Retroactive Ratemaking

¶ 42        Finally, the Attorney General and CUB argue that Rider VBA constituted
       impermissible retroactive ratemaking. Like the rule against single-issue ratemaking,
       the rule against retroactive rulemaking is a judicial gloss on the Act. See Citizens
       Utilities, 124 Ill. 2d at 207 (“The prohibition of retroactive ratemaking is derived from
       the overall scheme of the Act and the role of the Commission in the ratemaking
       process.”). Because rates operate only prospectively (Hartigan, 148 Ill. 2d at 396
       (citing Mandel Brothers, Inc. v. Chicago Tunnel Terminal Co., 2 Ill. 2d 205, 210
       (1954)), we have long held that the Commission may not later correct a rate through a
       refund or surcharge (BPI I, 136 Ill. 2d at 209).

¶ 43      The Commission and the companies respond that because neither the Attorney
       General or CUB raised this issue in their applications for rehearing before the
       Commission, they forfeited review of the issue. We agree.

¶ 44       Under section 10-113(a) of the Act, “No person or corporation in any appeal shall
       urge or rely upon any grounds not set forth in [an] application for a rehearing before the
       Commission.” 220 ILCS 5/10-113(a) (West 2010). The language of that statute is quite
       plain: A party to an appeal from a Commission decision may not raise an issue or

                                                - 15 -
       objection that was not expressly raised in an application for rehearing before the
       Commission. See Citizens Utilities, 124 Ill. 2d at 203-04; Independent Voters of Illinois
       v. Illinois Commerce Comm’n, 117 Ill. 2d 90, 101 (1987) (holding that an issue not
       raised before the Commission as a ground for rehearing was waived). The purpose of
       that requirement is to inform the Commission and opposing parties of putative legal
       and factual errors. Citizens Utility Board, 166 Ill. 2d at 135.

¶ 45        Neither the Attorney General nor CUB urged or relied upon the prohibition against
       retroactive ratemaking in their applications for rehearing below. The Attorney General
       and CUB ask us to excuse this omission because the Attorney General raised that issue
       in the application for rehearing in the 2008 case. That is insufficient. Just as section
       10-113(a) does not allow a party to an appeal to raise issues by implication (see id. at
       136), or to substitute a general allegation for a specific one (see City of Granite City v.
       Illinois Commerce Comm’n, 407 Ill. 245, 250 (1950)), it also does not contemplate
       bootstrapping issues into a current appeal if they were raised at some point in an earlier
       and separate case.

¶ 46       The appellate court chose to address this argument, noting that forfeiture is a
       limitation on the parties, and not its own jurisdiction. The appellate court, however, has
       jurisdiction to review administrative decisions only as provided by statute. Ill. Const.
       1970, art. VI, § 6; Town & Country Utilities, Inc. v. Illinois Pollution Control Board,
       225 Ill. 2d 103, 121-22 (2007). This special statutory jurisdiction is limited to the
       language of the Act conferring it. Collinsville Community Unit School District No. 10
       v. Regional Board of School Trustees, 218 Ill. 2d 175, 182 (2006) (quoting Fredman
       Brothers Furniture Co. v. Department of Revenue, 109 Ill. 2d 202, 210 (1985)). Parties
       seeking to invoke such jurisdiction must strictly comply with the Act. ESG Watts, Inc.
       v. Pollution Control Board, 191 Ill. 2d 26, 30 (2000); see also Lockett v. Chicago
       Police Board, 133 Ill. 2d 349, 353 (1990) (“Since the Administrative Review Law is a
       departure from common law, the procedures it establishes must be strictly adhered to in
       order to justify its application.”). Because the Attorney General and CUB did not
       comply with section 10-113(a) of the Act with respect to their retroactive ratemaking
       argument, they forfeited review of the Commission’s decision on that ground. We
       therefore vacate the appellate court’s holding as to retroactive ratemaking.




                                               - 16 -
¶ 47                                 CONCLUSION

¶ 48      For the reasons that we have stated, we affirm the appellate court’s decision
       confirming the Commission’s decision to approve Rider VBA on a permanent basis.



¶ 49      Affirmed.




                                          - 17 -
