                           ILLINOIS OFFICIAL REPORTS
                                        Appellate Court




        People ex rel. Madigan v. Illinois Commerce Comm’n, 2011 IL App (1st) 100654




Appellate Court            THE PEOPLE ex rel. LISA MADIGAN, Attorney General of the State
Caption                    of Illinois, Petitioner, v. ILLINOIS COMMERCE COMMISSION;
                           NORTH SHORE GAS COMPANY, PEOPLES GAS LIGHT & COKE
                           COMPANY; VANGUARD ENERGY SERVICES, LLC; PRAIRIE
                           POINT ENERGY, LLC d/b/a Nicor Advanced Energy LLC; UNITED
                           WORKERS UNION OF AMERICA, AFL-CIO, LOCAL NO. 18007;
                           CONSTELLATION NEW ENERGY, INC., Gas Division; CITIZENS
                           UTILITY BOARD; THE CITY OF CHICAGO; and RETAIL GAS
                           SUPPLIERS, Respondents.



District & No.             First District, Fifth Division
                           Docket Nos. 1-10-0654, 1-10-0655, 1-10-0936, 1-10-1790, 1-10-1846,
                           1-10-1852 cons.


Filed                      September 30, 2011


Held                       In proceedings before the Illinois Commerce Commission on the action
(Note: This syllabus       of two gas utilities to restructure residential gas rates and gain approval
constitutes no part of     of a special rider for infrastructure improvements, the Commission
the opinion of the court   abused its discretion in approving the rider because the rider constituted
but has been prepared      single-issue ratemaking without a showing of special circumstances to
by the Reporter of         provide adequate justification, but the Commission’s determination of the
Decisions for the          utilities’ operating expenses and rate base would not be disturbed, the
convenience of the         Commission did not err in excluding prudent and reasonable pension
reader.)
                           costs from the rate base, and the Commission did not err in making an
                           adjustment to the utilities’ return on equity.
Decision Under             Petition for review of orders of Illinois Commerce Commission.
Review


Judgment                   Affirmed in part and reversed in part; cause remanded.


Counsel on                 Kristin Munsch and Christie R. Hicks, both of Citizens Utility Board, and
Appeal                     Lisa Madigan, Attorney General (Michael A. Scodro, Solicitor General,
                           and Paul Berks, Janice A. Dale, and Karen L. Lusson, Assistant Attorneys
                           General, of counsel), both of Chicago, for petitioners.

                           John P. Ratnaswamy and Carla Scarsella, both of Rooney Rippie &
                           Ratnaswamy LLP, Mary Klyasheff, of Integrys Energy Group, Inc., and
                           Theodore Eidukas, of Foley & Lardner LLP, all of Chicago, and Bradley
                           D. Jackson, of Foley & Lardner LLP, of Madison, Wisconsin, for
                           respondents North Shore Gas Company and Peoples Gas Light & Coke
                           Company.

                           John P. Kelliher and James E. Weging, Special Assistant Attorneys
                           General, of Chicago, for respondent Illinois Commerce Commission.


Panel                      JUSTICE HOWSE delivered the judgment of the court, with opinion.
                           Presiding Justice Epstein and Justice J. Gordon concurred in the
                           judgment and opinion.



                                              OPINION

¶1          This consolidated appeal arises from the filing of an action by North Shore Gas Company
        (North Shore) and Peoples Gas Light and Coke Company (Peoples Gas) (together referred
        to as the Utilities) with the Illinois Commerce Commission (Commission), which sought to
        restructure the rates the gas utility companies charged residential customers for the delivery
        of natural gas and approve a special rider for infrastructure improvements to the utilities’ gas
        delivery system. The Commission entered its final order on January 22, 2010, and a
        subsequent order on rehearing on June 2, 2010. Several parties involved in the proceedings
        objected to certain aspects of the Commission’s final order and filed appeals, which have
        been consolidated into the present action before this court.
¶2          For the reasons that follow, we affirm the Commission’s order in part, reverse in part,
        and remand the cause for further proceedings consistent with this opinion.

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¶3                                         BACKGROUND
¶4       On February 25, 2009, North Shore and Peoples Gas each filed tariffs with the
     Commission that consisted of a proposed general increase in natural gas distribution rates,
     certain new tariff riders, and other tariff revisions. The tariff requests were supported by
     “prefiled” direct testimony and other material. On March 25 and July 8, 2009, the
     Commission suspended the proposed rates and initiated contested rate cases to examine the
     proposed rates and revisions. Several parties intervened, including the parties to this appeal,
     and an evidentiary hearing was held.
¶5       The Commission entered its final dispositive order on January 21, 2010, permanently
     cancelling previous gas rates and ordering the filing of new tariff sheets. In doing so, the
     Commission authorized Peoples Gas to file new tariff sheets designed to produce annual
     revenues of $530,633,000, which represented a gross increase of $69,803,000; and North
     Shore to file new tariff sheets to produce annual revenues of $79,067,000, which represented
     a gross increase of $13,867,000. The Commission determined the “just and reasonable”
     return which Peoples Gas should be allowed to earn on its net original cost rate base is
     8.05%, which incorporated a return on common equity of 10.23% and costs of long-term
     debt of 5.28% with a just and reasonable capital structure of 56% common equity and 44%
     long-term debt. North Shore’s rate of return was set at 8.19%, which incorporated a return
     on common equity of 10.33% and costs of long-term debt of 5.48% with a just and
     reasonable capital structure of 56% common equity and 44% long-term debt. In calculating
     those rates, the Commission denied the gas utilities recovery of certain employee incentive
     compensation and pension costs. The Commission also approved an “Infrastructure Cost
     Recovery Rider” (Rider ICR) proposed by Peoples Gas, which consisted of a monthly
     surcharge on customer bills designed to allow Peoples Gas to recover costs associated with
     replacing certain additional cast iron and ductile iron gas mains and connecting facilities.
¶6       Several parties, including the State of Illinois (the People), the Citizens Utility Board (the
     CUB) and the Utilities, filed timely applications for rehearing. The Commission granted
     rehearing to the People and the CUB solely on the limited issue of whether Rider ICR’s
     “baseline” was improperly set. The Commission denied all of the other parties’ applications
     for rehearing. The Commission ultimately approved the Rider ICR baseline that was agreed
     to by its staff (hereinafter, staff) and Peoples Gas, making only small changes to Rider ICR’s
     audit provisions in its revised order. Several parties filed separate appeals from the
     Commission’s final order, which have been consolidated into the present action pending
     before this court.

¶7                                           ANALYSIS
¶8                                     I. Standard of Review
¶9        It is well settled that we are required to give substantial deference to the Commission’s
     decisions, in light of its expertise and experience in this area. Commonwealth Edison Co. v.
     Illinois Commerce Comm’n, 398 Ill. App. 3d 510, 514 (2009); Alhambra-Grantfork
     Telephone Co. v. Illinois Commerce Comm’n, 358 Ill. App. 3d 818, 821 (2005). The

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       Commission’s “findings of fact are to be considered prima facie true; its orders are
       considered prima facie reasonable; and the burden of proof on all issues raised in an appeal
       is on the appellant.” United Cities Gas Co. v. Illinois Commerce Comm’n, 163 Ill. 2d 1, 11
       (1994). Such deference 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). Therefore, our
       review is generally limited to the following matters: (1) whether the Commission acted
       within its authority; (2) whether it made adequate findings to support its decision; (3)
       whether the decision was supported by substantial evidence; and (4) whether state or federal
       constitutional rights were infringed. Commonwealth Edison Co., 398 Ill. App. 3d at 514
       (citing Commonwealth Edison Co. v. Illinois Commerce Comm’n, 322 Ill. App. 3d 846, 849
       (2001)). We will not reevaluate the credibility or weight of the evidence, nor substitute our
       judgment for that of the Commission. Commonwealth Edison Co., 398 Ill. App. 3d at 514.

¶ 10                           II. The People’s and the CUB’s Appeal
¶ 11       Both the People and the CUB appeal from the Commission’s decision to approve Rider
       ICR. The People and CUB contend the Commission abused its discretion by allowing
       Peoples Gas to recoup what amount to discretionary infrastructure investments through a
       rider. Specifically, the People and the CUB contend the Commission misunderstood the legal
       standard that governs its authority to engage in “single issue rulemaking” through a rider.
       The People and the CUB also contend the record lacks substantial evidence to support the
       extraordinary rate recovery mechanism of a rider in this case.
¶ 12       The evidence adduced below established Peoples Gas’ service territory covers an area
       of about 237 square miles with a population of approximately 3 million people, serviced by
       4,025 miles of gas distribution mains. At the time of the Commission proceeding,
       approximately half of Peoples Gas’ distribution main system was still comprised of cast iron
       and ductile iron gas mains, which are only able to provide low-pressure gas service. Peoples
       Gas presented evidence that these aging cast iron ductile iron mains require a higher level
       of risk management, generate a larger number of leaks and cause a larger number of service
       outages than modern mains made from polyethylene pipe material would cause.
¶ 13       In 1981, Peoples Gas decided to begin replacing its outdated main system. Peoples Gas
       estimated the replacement program would not be completed until sometime between 2050
       and 2080. Under the current replacement program, Peoples Gas had successfully replaced
       1,568 of 4,031 miles of old mains, with an average replacement rate of 45 miles per year
       through 2008. However, the average annual replacement rate of 45 miles had dropped to 20
       miles for 2009 and an estimated 10 miles for 2010 due to the “harsh economic climate,”
       which caused Peoples Gas to decide to preserve its capital rather than expend it on an
       accelerated main replacement program.
¶ 14       Peoples Gas first sought an infrastructure cost recovery rider in a previous rate case filed
       in 2007; however, the Commission rejected the request. Although the Commission
       determined it was within its discretionary powers to authorize the rider, it noted Peoples Gas
       had failed to establish there was a “need” for such a rider. The Commission’s final decision
       filed on March 25, 2009, identified six standards Peoples Gas had to demonstrate in order


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       for the Commission to find there is a need for an infrastructure cost recovery rider: (1) a
       detailed description and cost analysis of the proposed system modernization; (2) an
       identification, evaluation and justification of the technology involved; (3) a detailed
       identification and description of the improved functionalities of the modernized system both
       for the company and for customers; (4) an analysis of the benefits of the system
       modernization in terms of reduced operating and maintenance costs, enhanced system safety,
       improved customer safety and reliability, reduced greenhouse gas emissions and increased
       options for energy efficient appliances, new products and services; (5) an analysis of
       regulatory mechanisms to allow companies to both recover their costs of system
       modernization as well as to flow reduced system costs back to customers; and (6) an
       identification and analysis of legal and regulatory barriers to the implementation of system
       modernization.
¶ 15       In the rate case at issue here, Peoples Gas again sought an infrastructure cost recovery
       rider through Rider ICR. Peoples Gas argued the rider did not violate the rule against single-
       issue ratemaking because it merely facilitates the direct recovery of particular costs in a
       manner that either has no direct impact on or accounts for any corresponding changes to the
       components underlying the utility’s rate of return so that there is no under or over recovery.
       In support of its position, Peoples Gas noted the proposed rider included a factor for
       offsetting any savings generated by the accelerated program, thus preventing any
       overstatement of the utility’s overall revenue requirements by Ride ICR. Peoples Gas also
       noted the rider had been modified, at the Staff’s suggestion, to require re-calculation of the
       savings factor no less than every three years, with the Commission and other parties retaining
       the right to initiate proceedings to do so more frequently if deemed necessary.
¶ 16       In support of Rider ICR, Peoples Gas also presented a substantial amount of expert
       testimony regarding the cost analysis and benefits the improved functionality of the new
       system would provide to the utility and its customers. Specifically, Peoples Gas provided
       testimony from Salvatore Marano, a licensed professional engineer, indicating that system
       modernization would provide several benefits to customers, including enhanced system
       safety, reduced system costs, potential new products and significant environmental benefits.
       Marano testified that the new distribution system would provide substantial savings to
       Peoples Gas’ ongoing operations and maintenance costs by reducing the number of leak
       repairs and safety inspections the utility had to conduct, which would generate a total of $244
       million in cost savings. Marano also estimated Peoples Gas’ net construction cost savings
       from accelerating the main replacement program construction through the use of the rider
       would be $273 million.
¶ 17       Marano further noted that an additional benefit to the City of Chicago (the City) and its
       residents of accelerating the main replacement program through the use of a rider would be
       the creation of a substantial number of jobs in the community. Peoples Gas’ witness James
       Schott explained a rider would allow the Utility to proceed with an accelerated main
       replacement program much more quickly, without the financial uncertainty that accompanies
       having to wait until the next rate case to recover costs associated with modernizing the
       system.
¶ 18       The Union representing Peoples Gas’ employees who work on the mains on a daily basis

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       and the City of Chicago also intervened in support of Rider ICR. Although the City
       recognized Peoples Gas’ expert witnesses had not testified the current gas main system was
       unsafe or in immediate danger, the City noted the magnitude of potential safety issues
       presented by the antiquated system supported replacing the system as expeditiously as
       reasonably possible. While the City noted the increased use of riders by utilities threatens
       effective and thorough regulation of monopoly services, the City argued replacing the old
       mains as expeditiously as reasonable to ensure public safety presented an extraordinary
       situation justifying the use of a rider.
¶ 19       The People, the CUB and the Commission’s Staff objected to Rider ICR. The People
       argued the proposed rider should be rejected by the Commission because it constituted
       improper single-issue ratemaking. The People noted that instead of considering costs and
       earnings in the aggregate, where potential changes in one or more items of expense or
       revenue may be offset by increases and decreases in other such items, the Rider ICR proposal
       only considered changes in infrastructure investment in isolation–ignoring the totality of
       circumstances. The People noted the capital costs associated with an accelerated main
       replacement were neither “unexpected, volatile or fluctuating expenses”; nor were the costs
       authorized by statute.
¶ 20       The People also noted that Peoples Gas had refused to commit to a specific accelerated
       main replacement plan, that Peoples Gas would not commit to any certain start date on
       acceleration, and that Peoples Gas would retain control over the schedule of acceleration.
       The People argued the 2030 completion date Marano testified to was both impractical and
       unrealistic as a timeline for main replacement. The People also argued Marano’s 2030
       completion date for main replacement would cost ratepayers over $3 billion more than
       Peoples Gas’ existing 2059 completion date.
¶ 21       Although the CUB did not specifically address the operational need for an accelerated
       modernization program, it also argued the rider should be rejected given the legal
       proscriptions against single-issue ratemaking. In support, the People and the CUB’s expert
       witness, Scott Rubin, noted Peoples Gas had failed to show that the existence or absence of
       Rider ICR would affect its cost of capital, impact its capability to finance necessary
       improvements, or jeopardize its ability to provide safe and reliable service. The People and
       the CUB argued Peoples Gas’ own historical rate of main replacement investment suggested
       Rider ICR is simply not needed.
¶ 22       The Staff also argued to the Commission that Rider ICR should be rejected. Although
       the Staff recognized the Commission has the discretion to approve riders in proper cases as
       an alternative to the traditional approach of setting rates, the Staff argued Peoples Gas had
       failed to provide adequate justification for Rider ICR. Although Peoples Gas presented
       expert testimony that the proposed rider was consistent with the points raised by the Staff and
       the six standards outlined by the Commission in the last rate case, the Staff’s witness
       explained the Staff’s primary position in the previous case was to reject the proposed rider
       because the need and justification for rider recovery had not been established. The Staff
       noted the need for an accelerated infrastructure replacement program and the cost recovery
       mechanism for such a program are two different issues. While the Staff recognized Marano’s
       testimony addressed the need for an accelerated program to replace the current network of

                                                -6-
       cast iron and ductile iron mains, the Staff noted Marano’s testimony did not explain why the
       use of a rider mechanism to recover costs for that goal would be justified over traditional
       recovery through base rates.
¶ 23        The Staff’s expert witnesses, Sheena Knight-Garlisch and Peter Lazare, both agreed
       Peoples Gas had not adequately explained why traditional rate case fillings would not allow
       a prompt and fair rate recovery for the costs associated with modernizing the system. The
       Staff’s witnesses also noted Peoples Gas is seeking funding for an accelerated replacement
       program that has yet to be developed, which makes it difficult to assess the need for a special
       recovery mechanism without knowing the Utility’s funding needs.
¶ 24        The Commission determined the rule against single-issue ratemaking was not a bar to its
       adoption of Rider ICR. The Commission also determined the Utility’s proposed rider
       complied with the six standards it had outlined in the earlier rate case. Accordingly, the
       Commission exercised its legal authority to approve Rider ICR. However, the Commission
       adopted several of the Staff’s recommendations intended to ensure proper regulatory
       oversight and implementation of the rider.
¶ 25        In reaching its conclusion, the Commission stated “[i]mmediate safety concerns are not
       what drive our concern.” However, the Commission highlighted a more accelerated approach
       to upgrading the system is needed to prevent or mitigate a foreseeable future risk of system
       failure, and noted that “accelerated system improvement has become for the Commission a
       matter of the public interest more so than just a Company proposal.” Although the
       Commission recognized section 8-503 of the Public Utilities Act (Act) (220 ILCS 5/8-503
       (West 2008)) would authorize it to require Peoples Gas to undertake and accelerated main
       replacement program through traditional ratemaking procedures, the Commission noted that
       to pursue such an action would require it to initiate a new formal proceeding and employ all
       of its traditional processes to arrive at a decision. Because a burdensome and time-consuming
       series of rate cases would likely be needed to implement an accelerated program under
       section 8-503, the Commission held it could exercise its discretionary authority in the most
       prudent manner by approving Rider ICR.
¶ 26        The amount a utility is permitted to recover from its customers in the rates it charges is
       determined by its revenue requirement. City of Chicago v. Illinois Commerce Comm’n, 281
       Ill. App. 3d 617, 627 (1996). “A company’s revenue requirement is the sum of a company’s
       operating costs and the rate of return on its invested capital.” City of Chicago, 281 Ill. App.
       3d at 627 (citing Citizens Utilities Co. of Illinois v. Illinois Commerce Comm’n, 124 Ill. 2d
       195, 201 (1988)). Therefore, ratemaking considers costs and earnings in the aggregate
       because potential changes in one or more items might be offset by changes in other items.
       City of Chicago, 281 Ill. App. 3d at 627 (citing A. Finkl & Sons Co. v. Illinois Commerce
       Comm’n, 250 Ill. App. 3d 317, 325 (1993) (Finkl)).
¶ 27        Single-issue ratemaking is prohibited because it considers changes in particular portions
       of a utility’s revenue requirement in isolation, which ignores potentially offsetting
       considerations and risks understating or overstating the overall revenue requirement.
       Business & Professional People for the Public Interest v. Illinois Commerce Comm’n, 146
       Ill. 2d 175, 244 (1991) (BPI). However, a rider can change a rate without requiring the utility


                                                -7-
       to delay recovery until it files a general rate case. Citizens Utility Board v. Illinois Commerce
       Comm’n, 166 Ill. 2d 111, 133 (1995).
¶ 28       Our supreme court has recognized a rider mechanism:
                “merely facilitates direct recovery of a particular cost, without direct impact on the
                utility’s rate of return. The prohibition against single-issue ratemaking requires that,
                in a general base rate proceeding, the Commission must 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, including its return on
                investment.” Citizens Utility Board, 166 Ill. 2d at 138.
¶ 29       Our supreme court has also recognized that the single-issue rule “does not circumscribe
       the Commission’s ability to approve direct recovery of unique costs through a rider when
       circumstances warrant such treatment.” Citizens Utility Board, 166 Ill. 2d at 138. Because
       the Commission has the power to authorize riders in a proper case, such authorization will
       not be reversed absent an abuse of discretion. City of Chicago, 281 Ill. App. 3d at 627.
¶ 30       In Finkl, the Commission approved a rider so the utility could recover costs associated
       with certain demand-side management programs. The Commission found the rider was the
       most appropriate method of recovery of the costs, noting “the actual expenses are difficult
       to predict in advance, especially given the fact that neither the Commission nor [the utility]
       has extensive experience in the implementation of [demand-side] analysis and programs, and
       may fluctuate from year to year and from month to month.” (Internal quotation marks
       omitted.) Finkl, 250 Ill. App. 3d at 322. This court reversed, holding the rider violated the
       prohibition against single-issue ratemaking. Finkl, 250 Ill. App. 3d at 326. Although the
       court recognized riders are “useful in alleviating the burden imposed upon a utility in
       meeting unexpected, volatile or fluctuating expenses,” the court noted the costs involved in
       the approved rider revealed “no greater potential for unexpected, volatile or fluctuating
       expenses which [the utility] cannot control, than costs incurred in estimating base
       ratemaking.” (Emphasis in original.) Finkl, 250 Ill. App. 3d at 327.
¶ 31       In Citizens Utility Board, the CUB contended the utility’s use of a rider to recover coal-
       tar cleanup costs allowed the Commission to approve cost recovery without considering
       other elements of the revenue requirement formula, ignoring the possibility that a rate
       increase may not be necessary. In approving the coal-tar cleanup rider at issue, the
       Commission noted that, given the wide variations and the difficulties in forecasting the costs
       of investigation and remediation activities, a rider could be expected to provide a more
       accurate and efficient means of tracking and matching costs with recoveries than would base
       rate recovery methods. Citizens Utility Board, 166 Ill. 2d at 138-39. Numerous witnesses
       testified to the uncertain and variable nature of the expenses for coal-tar cleanup. Id. at 139.
       Accordingly, our supreme court found that the proposed recovery through a rider mechanism,
       outside the context of a traditional rate proceeding, did not violate the prohibition against
       single-issue ratemaking. Id.
¶ 32       In City of Chicago, we recognized a rider is appropriate for recovering fluctuating costs;
       however, we rejected the proposition that only unexpected, volatile or fluctuating expenses
       are properly recovered through a rider. City of Chicago, 281 Ill. App. 3d at 628 (citing


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       Citizens Utility Board, 166 Ill. 2d at 138-39). The Commission approved the use of a rider
       in order for the utility to recover its franchise-type fees and costs. Although this court
       recognized riders should be closely scrutinized because of the danger of single-issue
       ratemaking, we found such a danger was not present in the case before us. City of Chicago,
       281 Ill. App. 3d at 628-29. The court held the “proposed restructuring was exactly that–a
       reallocation which did not have any impact whatsoever on [the utility’s] overall revenue
       requirement.” Id. at 629. The court noted the franchise fees were already included in the
       utility’s overall rate structure; the Commission’s order simply redistributed them. Id.
       “Because the rider here ‘merely facilitates direct recovery of a particular cost, without direct
       impact on the utility’s rate of return’ (Citizens Utility Board, 166 Ill. 2d at 138, 651 N.E.2d
       at 1102), it was not an abuse of discretion for the Commission to use it as the mechanism of
       cost recovery.” Id.
¶ 33        By contrast, in Commonwealth Edison Co., 405 Ill. App. 3d at 414-15, appeal denied,
       No. 111548, 949 N.E.2d 657 (Ill. Mar. 30, 2011) (table), the Second District considered the
       People’s and the CUB’s contentions that a Commission-approved provision known as “Rider
       SMP” was contrary to settled ratemaking principles and not justified by the evidence.
       ComEd, the utility, proposed Rider SMP, which consisted of a “system modernization
       project” charge to customers, in order to immediately recoup the costs of modernizing its
       electricity delivery system toward a “smart grid.” In support of the rider, ComEd presented
       testimony that a smart grid would achieve cost savings and improve efficiency by phasing
       out 675 full-time meter readers and supervisor positions, eliminating meter reading
       equipment, improving bill collections, reducing billing errors and disconnecting nonpaying
       customers more efficiently. ComEd argued to the Commission that Rider SMP would give
       customers the benefits of the smart grid technology earlier than might otherwise occur,
       because ComEd could not afford the project without the rider.
¶ 34        The court recognized that because a rider, by nature, is a method of single-issue
       ratemaking, it is not allowed absent a showing of exceptional circumstances. Commonwealth
       Edison Co., 405 Ill. App. 3d at 415 (citing Finkl, 250 Ill. App. 3d at 327). After analyzing
       the prior decisions in Finkl, City of Chicago and Citizens Utility Board, the Second District
       gleaned a guiding principle for testing a rider’s validity:
                “[T]he Commission has discretion to approve a utility’s proposed rider mechanism
                to recover a particular cost if (1) the cost is imposed upon the utility by an external
                circumstance over which the utility has no control and (2) the cost does not affect the
                utility’s revenue requirement. In other words, a rider is appropriate only if the utility
                cannot influence the cost [citation] and the expense is a pass-through item that does
                not change other expenses or increase income [citation].” Id. at 414 (citing Citizens
                Utility Board, 166 Ill. 2d at 138).
¶ 35        The court held its test reconciled the approval of diverse riders, including: “(1) a rider to
       recoup increases in the wholesale cost of natural gas, *** [citation]; (2) a rider to recoup
       expenses for government-mandated environmental remediation [citations]; and (3) a rider
       to recoup a franchise fee that a municipality charges the utility [citation].” Id. (citing Citizens
       Utility Board, 166 Ill. 2d at 138-39, City of Chicago v. Illinois Commerce Comm’n, 13 Ill.
       2d 607, 614 (1958), and City of Chicago, 281 Ill. App. 3d at 628-29). The court recognized

                                                  -9-
       that in each instance noted above, the expense included in the rider was an externality
       imposed on the utility, and, therefore, the expense was properly passed directly on to the
       consumer through a rider without affecting the utility’s actual return on investment. Id. The
       Second District also noted its test explained the rejection of the rider in Finkl for demand-
       side management expenses, where this court held the rider was invalid because the expenses
       were something completely within the utility’s control. Id. (citing Finkl, 250 Ill. App. 3d at
       326).
¶ 36        The court held Rider SMP did not meet its criteria to warrant appropriate single-issue
       ratemaking because: (1) the expenses related to upgrading to smart grid technology were not
       “unexpected, volatile, or fluctuating,” as ComEd alone dictated the program’s scope and,
       therefore, its costs; (2) the capital costs associated with the upgrades were not the result of
       a legislative mandate but rather were the result of ComEd’s decision to renovate to reduce
       other costs; (3) ComEd can cover the expenses by a fiscal and operational plan that is
       completely within the utility’s control; and (4) the Commission heard no evidence that the
       system modernization costs might produce unacceptable financial outcomes if not afforded
       special treatment. Commonwealth Edison Co., 405 Ill. App. 3d at 414-15. Precisely because
       the improvements covered by Rider SMP were expected to reduce other expenses and
       increase income in the long term, which would affect the utility’s revenue requirement, the
       court held to allow Rider SMP would be to improperly consider in isolation changes in a
       particular portion of a utility’s revenue requirement. Id. at 415 (citing BPI, 146 Ill. 2d at
       244). Accordingly, the court concluded that the Commission abused its discretion and
       reversed Rider SMP, finding the rider constituted improper single-issue ratemaking that was
       not justified by any special circumstances. Id. In support, the court noted “[t]he evidence
       showed that ComEd historically has invested in capital distribution improvements and
       recouped those costs through traditional ratemaking procedures, and the system
       modernization program should be treated no differently.” Id.
¶ 37        In this case, Peoples Gas and the Commission stress the real issue is whether the cost
       recovery mechanism facilitates cost recovery without directly impacting the utility’s rate of
       return. See Citizens Utility Board, 166 Ill. 2d at 138. The Commission notes that by
       removing the cost of the modernization from base rates and recovering it on a dollar-by-
       dollar basis through a rider, the remaining base rates, together with the costs recovered
       through rider, are still designed to generate enough revenue to allow the utility to pay its bills
       and obtain the same rate of return as established in the rate case. The Commission suggests
       this evidences the fact that the rider would not impact Peoples Gas’ rate of return. If Rider
       ICR was simply a reallocation of costs that had no direct impact on the utility’s rate of return,
       the Commission would not have abused its discretion in approving the rider. See City of
       Chicago, 281 Ill. App. 3d at 628-29 (“Because the rider here ‘merely facilitates direct
       recovery of a particular cost, without direct impact on the utility’s rate of return’ (Citizens
       Utility Board, 166 Ill. 2d at 138, 651 N.E.2d at 1102), it was not an abuse of discretion for
       the Commission to use it as a mechanism of cost recovery.”).
¶ 38        The People and the CUB counter that the costs covered by Rider ICR do impact the
       utility’s rate of return. Specifically, the People and the CUB note the evidence in the record
       establishes that over a 49-year period, Rider ICR would increase Peoples Gas’ revenue

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       requirement substantially. The People argue that any increase in the revenue requirement
       “creates a proportional increase in the return on that investment” (see Citizens Utility Board,
       166 Ill. 2d at 137), which in turn would have a direct impact on the utility’s rate of return.
¶ 39        We note the record reflects that a witness for the People and the CUB, Mr. Rubin,
       testified the net effect Rider ICR would have on Peoples Gas’ revenue requirement would
       be to increase it by $3 billion over what it would have been under the existing main
       replacement program. However, Peoples Gas notes that Mr. Rubin admitted on cross-
       examination that if his analysis was carried out until the capital investments were completely
       depreciated for both programs, Peoples Gas’ current main replacement program would in fact
       generate an overall larger revenue requirement than the accelerated main replacement
       program would.
¶ 40        In light of Commonwealth Edison Co, we find Rider ICR does not meet the criteria
       necessary to warrant appropriate single-issue ratemaking. Similar to Rider SMP, the rider at
       issue here does not include recovery of costs that are necessarily “unexpected, volatile, or
       fluctuating,” as Peoples Gas alone dictates the program’s scope and, therefore, its ultimate
       cost. Rider ICR is also not intended to recoup expenses for government-mandated
       environmental remediation; nor are the costs the result of a legislative mandate. Instead, the
       costs covered by Rider ICR are for capital improvements to Peoples Gas’ natural gas delivery
       system that are likely to have a direct impact on the utility’s actual rate of return.
¶ 41        Moreover, similar to Rider SMP, the Staff witnesses’ testimony below suggests the costs
       associated with an accelerated main replacement program under Rider ICR could be
       recovered through traditional ratemaking procedures. As the People’s expert witness noted,
       Peoples Gas’ own historical rate of main replacement investment indicates the costs
       associated with the improvements were previously able to be recovered through traditional
       rate cases, without the need to resort to a special rider cost recovery mechanism. Although
       the Staff’s expert witnesses conceded below that acceleration of the main replacement
       program was in the public’s best interests, the Staff’s evidence also indicated that traditional
       ratemaking procedures provide an acceptable avenue to pursue such a goal without requiring
       the use of a rider. In fact, the Commission’s order itself specifically notes the Commission
       could have required Peoples Gas to undertake an accelerated main replacement program
       under section 8-503 of the Act while utilizing traditional ratemaking procedures. While
       traditional ratemaking procedures may constitute a burdensome and time-consuming process
       in the Commission’s eyes, a desire to streamline that legislatively created process alone does
       not constitute a showing of the type exceptional circumstances necessary to justify the use
       of a rider. See Commonwealth Edison Co., 405 Ill. App. 3d at 415 (citing Finkl, 250 Ill. App.
       3d at 327).
¶ 42        Accordingly, under the standards set out by the Second District in Commonwealth Edison
       Co., we find the Commission abused its discretion in approving Rider ICR because the rider
       constituted single-issue ratemaking that was not adequately justified by any special
       circumstances. See Commonwealth Edison Co., 405 Ill. App. 3d at 415 (“The evidence
       showed that ComEd historically has invested in capital distribution improvements and
       recouped those costs through traditional ratemaking procedures, and the system
       modernization program should be treated no differently.”).

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¶ 43                                 III. The Utilities’ Appeal
¶ 44       The Utilities contend the Commission erred in determining the Utilities’ operating
       expenses and rate base. Specifically, the Utilities contend the Commission committed
       reversible error by: (1) denying the Utilities the full recovery of their prudent and reasonable
       employee incentive compensation costs; (2) calculating the Utilities’ costs of capital by
       making unwarranted and duplicative reductions in the Utilities’ approved rate of return on
       common equity; and (3) denying Peoples Gas the full recovery of its prudent and reasonable
       pension costs. Each of the alleged errors is addressed in turn below.

¶ 45                              A. Incentive Compensation Costs
¶ 46       The Utilities contend the Commission erred by disallowing almost all of the Utilities’
       prudent and reasonable employee incentive compensation costs. Specifically, the Utilities
       contend the Commission erred by: (1) unlawfully disallowing the Utilities’ employee
       incentive compensation costs despite uncontradicted evidence of, and no dispute regarding,
       the prudence and reasonableness of the costs; (2) applying an invalid Commission-created
       direct customer benefits standard that improperly disallowed prudent and reasonable
       incentive compensation costs; and (3) applying a standard that arbitrarily and capriciously
       picked what customer benefits count to allow cost recovery while disregarding other
       customer benefits.
¶ 47       Here, the Utilities’ primary witness regrading employee incentive compensation costs,
       James Hoover, testified that the Utilities design their total cash compensation packages at
       market median based on data collected from other energy service companies, that the
       Utilities design their total compensation programs, including their incentive compensation
       programs, in order to attract and retain a sufficient, qualified and motivated work force, and
       that attracting and retaining such a work force benefits customers by making sure there are
       enough workers to perform needed work, by maintaining and improving the quality of work
       and by reducing the expenses associated with recruiting and retaining new employees.
       Hoover also testified the employee stock plans were an important part of the overall
       compensation package that was designed to help attract and retain a qualified and motivated
       work force.
¶ 48       The Commission ultimately agreed with the Staff’s recommendation that incentive
       compensation that was related to financial goals, affiliate goals or shareholder goals should
       not be recoverable from ratepayers. The Commission found Hoover’s testimony did not
       “demonstrate a sufficient nexus between the expense and customer benefit.” The
       Commission agreed with the People’s witness that when incentive compensation seeks to
       achieve goals that primarily benefit shareholders, then it is reasonable to require that
       shareholders bear the cost of that incentive compensation. The Commission concluded
       attracting good employees is too remote a benefit for ratepayers to support recovery.
¶ 49       Illinois courts have recognized costs are generally recoverable from ratepayers if the costs
       are reasonable and prudent. BPI, 146 Ill. 2d at 247. Generally, reasonable and prudent
       expenditures for salaries should also be included in the rate base. Villages of Milford v.

                                                -12-
       Illinois Commerce Comm’n, 20 Ill. 2d 556, 566 (1960). The Utilities contend the “reasonable
       and prudent” standard is the only standard they had to satisfy in order for the employee
       incentive compensation costs to be included in its rate base, citing Citizens Utility Board,
       166 Ill. 2d at 121 (“In setting rates, the Commission must determine that the rates accurately
       reflect the cost of service delivery and must allow the utility to recover costs prudently and
       reasonably incurred.”).
¶ 50        Moreover, the Utilities note that none of the Staff’s or the People’s witnesses challenged
       Hoover’s testimony that the Utilities’ employee incentive costs were reasonable and prudent,
       and that the costs benefitted customers. The Utilities contend “[w]here the testimony of a
       witness is neither contradicted, either by positive testimony or by circumstances, nor
       inherently improbable, and the witness has not been impeached, that testimony cannot be
       disregarded by the trier of fact.” Bazydlo v. Volant, 164 Ill. 2d 207, 215 (1995).
¶ 51        Contrary to the Utilities’ contention, we find Illinois law supports the Commission’s use
       of a direct benefit standard in denying 90% of Peoples Gas’ and 93% of North Shore’s
       employee incentive compensation costs.
¶ 52        In Commonwealth Edison Co. v. Illinois Commerce Comm’n, 398 Ill. App. 3d 510
       (2009), appeal denied, 237 Ill. 2d 554 (2010), the Commission ruled that the utility, ComEd,
       did not demonstrate a sufficient nexus between the earnings-per-share portion of the
       employee incentive compensation plan and a benefit to ratepayers. In affirming the
       Commission’s decision, the court noted that although reasonable and prudent expenditures
       for salaries are generally included in the rate base, under certain circumstances it has been
       held that the cost of salaries should be apportioned between shareholders and ratepayers.
       Commonwealth Edison Co., 398 Ill. App. 3d at 517 (citing Du Page Utility Co. v. Illinois
       Commerce Comm’n, 47 Ill. 2d 550, 560-61 (1971), Villages of Milford, 20 Ill. 2d at 566, and
       Candlewick Lake Utilities Co. v. Illinois Commerce Comm’n, 122 Ill. App. 3d 219, 226
       (1983)). Accordingly, the court noted there is “ample precedent making a benefit to
       ratepayers a condition upon which the recovery of salary-related expense depends.”
       Commonwealth Edison Co., 398 Ill. App. 3d at 517. Moreover, the court noted the Act itself
       makes room for considerations beyond simply whether an expenditure is reasonable and
       prudent. Id. at 516 (citing 220 ILCS 5/16-108(c) (West 2004) (“Charges for delivery services
       shall be cost based, and shall allow the electric utility to recover the costs of providing
       delivery services through its charges to its delivery service customers that use the facilities
       and services associated with such costs.”)). The court also noted the utility bears the burden
       of proof on this issue when it is litigated before the Commission. Id. at 515 (citing Citizens
       Utility Board v. Illinois Commerce Comm’n, 276 Ill. App. 3d 730, 746 (1995)).
¶ 53        In support of its contention that the incentive plan benefitted ratepayers, ComEd cited
       testimony from its expert witness that incentive plans benefit everyone, including customers,
       because as “productivity rises, more attention is paid to cost control and more focus is given
       to customer service.” (Internal quotation marks omitted.) Id. The court noted that while the
       evidence certainly provided support for the utility’s position, it did not compel the conclusion
       the utility sought. Id. The court rejected the utility’s argument that the incentive plan
       benefitted ratepayers in the sense that attracting good employees raises the level of service
       customers will receive, finding such a benefit is “too remote.” Id. Since the record did not

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       establish the cost-cutting measures included in the incentive plan necessarily benefitted
       ratepayers, the court held the utility had not demonstrated the Commission erred in
       disallowing the costs. Id. at 519. The court noted that because other performance-based
       components of the incentive plan existed, the Commission could have reasonably concluded
       that the earnings-per-share portion of the plan provided only a tangential benefit to
       ratepayers. Id. The court recognized the notion that an earnings-per-share-based employee
       incentive plan provides benefits to shareholders was hardly a controversial position. Id.
¶ 54       In this case, similar to Commonwealth Edison Co., the Commission determined incentive
       compensation related to financial goals, affiliate goals or shareholder goals should not be
       recoverable. Although the Commission accepted Hoover’s testimony that the plans were
       designed to attract and retain highly qualified and motivated employees, the Commission
       determined such reasoning did not demonstrate a sufficient nexus between the expense and
       the customer benefit. The Commission agreed with the People’s witness that when incentive
       compensation seeks to achieve goals that primarily benefit shareholders, then it is reasonable
       to require that shareholders bear the cost of that incentive compensation.
¶ 55       Contrary to Peoples Gas’ contentions on appeal, both the Act and Illinois case law clearly
       reflect the direct customer benefit standard was an appropriate standard for the Commission
       to apply in this case. See Commonwealth Edison Co., 398 Ill. App. 3d at 519. Because the
       Commission’s expertise in these matters entitles its decisions to great deference on review,
       we will not reevaluate the credibility or weight of the evidence, nor substitute our judgment
       for that of the Commission. See Commonwealth Edison Co., 398 Ill. App. 3d at 514.
       Accordingly, we see no reason to disturb the Commission’s findings based on the record
       before us. Id.

¶ 56                                   B. Pension Plan Costs
¶ 57       Peoples Gas also contends the Commission erred by excluding its prudent and reasonable
       pension costs from the rate base. Specifically, Peoples Gas contends the Commission erred
       in agreeing with the Staff’s and the People’s proposal that Peoples Gas’ pension asset be
       excluded from the rate base on the theory that the asset was established by ratepayer-supplied
       funds.
¶ 58       Initially, we note Peoples Gas’ attempt to obtain recovery of the pension asset in its
       previous rate case filed in 2007 was also denied by the Commission. Peoples Gas’ appeal
       from that denial is still pending before the Second District.
¶ 59       For ratemaking purposes, the Commission notes a utility generally may not receive a
       return on investment from ratepayers for ratepayer-supplied funds. See Business &
       Professional People for the Public Interest v. Commerce Comm’n, 146 Ill. 2d 175, 258
       (1991); Du Page Utility Co. v. Illinois Commerce Comm’n, 47 Ill. 2d 550, 554-58 (1971);
       City of Alton v. Illinois Commerce Comm’n, 19 Ill. 2d 76, 85-91 (1960); Central Illinois
       Light Co. v. Commerce Comm’n, 252 Ill. App. 3d 577, 583 (1993).
¶ 60       During the hearing before the Commission in this case, Peoples Gas argued there was no
       evidence indicating customers funded the pension asset.
¶ 61       Alan Felsenthal, the Utilities’ primary witness on this issue, explained the pension asset

                                               -14-
       consisted of direct contributions by Peoples Gas shareholders and/or negative pension
       expenses–in both cases, investor-supplied funding. Felsenthal explained a negative pension
       expense results either from the expected return on prepaid plan assets exceeding other
       components of pension cost, or from some of the pension plan participants accepting lump-
       sum distributions in lieu of pension plan benefits. Felsenthal testified that for the eight-year
       period between 1998 and 2003, Peoples Gas had a negative pension expense totaling $174.3
       million. Felsenthal testified Peoples Gas’ pension asset is the cumulative difference between
       what has been contributed to the pension plan by Peoples Gas using investor-supplied funds
       and what has been expensed under the applicable accounting standards.
¶ 62        Felsenthal further explained that because the ratemaking process is based on the utility’s
       expenses, the prepaid pension asset represents amounts that have been contributed by
       Peoples Gas to the pension fund that have not been recovered from ratepayers or that have
       been treated as a negative pension expense. Felsenthal testified customers benefit from
       negative pension expenses because they reduce operating expenses and reduce the need for
       additional rate cases. Felsenthal explained negative pension expenses benefit investors only
       to the extent the expenses reduce cash funding requirements since gains or returns realized
       on pension fund investments must stay in the pension fund. Because the Commission has not
       allowed Peoples Gas to include its pension asset in the rate base, investors have not been
       allowed to earn a return on their investment. Felsenthal stressed there was no evidence
       indicating customers funded the pension asset.
¶ 63        Both the People and the Commission’s Staff disagreed with Peoples Gas’ argument that
       the pension asset was created with funds supplied by shareholders, not ratepayers. The Staff
       argued the pension asset was created with contributions using monies supplied by ratepayers
       through the collection of utility rates. Since the pension asset was funded by normal
       operations, rather than provided by shareholders, the Staff argued shareholders should not
       be allowed to earn a return on it.
¶ 64        The Commission determined that although Peoples Gas argued the pension asset was
       created with shareholder funds, no evidentiary support was provided. Accordingly, the
       Commission found no support in the record to allow for the inclusion of Peoples Gas’
       pension asset in the rate base, which would have the effect of allowing shareholders to earn
       a return on ratepayer supplied funds.
¶ 65        Peoples Gas contends on appeal that our supreme court has previously rejected a claim
       that a utility’s rate base should be reduced on the theory that part of it was the product of
       consumer-supplied funds, citing Citizens Utilities Co. of Illinois v. Illinois Commerce
       Comm’n, 124 Ill. 2d 195 (1998).
¶ 66        In Citizens Utility Co., the utility operated what is known as a “contract plant.” The
       question presented in the case arose from the different treatment accorded a contract plant
       for tax purposes and for ratemaking purposes. When computing its federal income taxes, the
       utility was allowed to deduct the depreciation in value of the contract plant, reducing the
       amount of income taxes it was required to pay. When computing its income tax expense for
       rate making purposes, however, the utility did not factor in the depreciation deduction, and
       therefore its income tax expense for ratemaking purposes was higher than what the utility


                                                -15-
       actually paid the federal government. The higher tax expense figure was used in ratemaking
       cases for the years 1958 through 1982, netting a total of $4,657,385 in tax benefits. When
       the error was discovered by the Commission in the utility’s 1983 rate case, the Commission
       ordered that $403,432 in tax depreciation expense for the 1983 test year be deducted from
       the utility’s taxable income. The Commission also ordered the balance of the past benefits,
       $4,253,953, be deducted from the utility’s rate base. The utility appealed, contending the
       $4.2 million rate base reduction was invalid as retroactive ratemaking.
¶ 67        The supreme court held the real effect, whether intended or not, of the $4.2 million
       reduction in the utility’s rate base was to deny retroactively the tax benefits the Commission
       permitted the utility to enjoy during the period from 1958 to 1982. Citizens Utilities Co. of
       Illinois, 124 Ill. 2d at 206-07. The court held such action clearly conflicted with fundamental
       principals of ratemaking in Illinois. Id. at 207. In reaching its conclusion, the supreme court
       rejected the Commission’s contention that the $4.2 million reduction could be justified on
       the ground that the reduction was necessary to prevent the company from earning a return
       on non-investor-supplied capital. Id. at 211. The Commission believed that even though the
       tax benefits did not become a discrete component of the utility’s rate base, they represented
       customer-supplied funds, and, therefore, the utility’s receipt of them necessitated an
       offsetting reduction in rate base. See Lindheimer v. Illinois Bell Telephone Co., 292 U.S. 151
       (1934); City of Alton, 19 Ill. 2d 76. The supreme court noted, however, that the amounts at
       issue before it were already recovered by the utility in past ratemaking orders as part of its
       income tax expense, and the validity of those orders cannot now be questioned. Citizens
       Utilities Co. of Illinois, 124 Ill. 2d at 212. The court also noted that although the Commission
       order contained language suggesting that the tax benefits were non-investor-supplied capital,
       the order did not state that a reduction would be necessary to prevent the company from
       earning a return on those sums in the future. Id. at 205.
¶ 68        In this case, unlike Citizens Utilities Co., the Commission’s actions in determining
       Peoples Gas’ pension asset should not be included in the rate did not constitute retroactive
       ratemaking. The Commission is not attempting to correct for a past error of omission by
       deducting the pension asset from the rate base. Instead, the Commission’s decision is based
       solely on what impact the pension asset should have on Peoples Gas’ current rate base,
       assuming the asset consists of customer-supplied funds. Because we are not faced with a
       retroactive ratemaking situation in this case, we find Citizens Utilities Co. provides little
       guidance as to how to resolve the actual issue pending before us.
¶ 69        The central issue before us remains whether the Commission’s decision to exclude the
       pension asset, which it found consisted of consumer-supplied funds, from Peoples Gas’ rate
       base was against the manifest weight of the evidence. Both the Staff’s and the People’s
       expert witness testified the pension asset constituted customer-supplied revenues and,
       therefore, should be deducted from the rate base calculation.
¶ 70        Although Peoples Gas’ expert witness obviously disagreed with that assessment and
       testified the pension asset was generated solely form shareholder revenue, we note the
       credibility of expert witnesses and the weight to be given their testimony are generally
       matters for the Commission to determine as the finder of fact. See Lefton Iron & Metal Co.
       v. Illinois Commerce Comm’n, 174 Ill. App. 3d 1049, 1060 (1988). “Decisions of the

                                                -16-
       Commission are entitled to great deference because they arise out of the deliberations of
       members who are much better qualified to interpret evidence supplied by specialists and
       technicians.” Id. Accordingly, we must refrain from reevaluating the credibility or weight of
       the evidence, or from substituting our judgment for that of the Commission unless the
       Commission’s judgment was clearly against the manifest weight of the evidence. See
       Commonwealth Edison Co., 398 Ill. App. 3d at 514.
¶ 71       Based on the record before us, we find the Commission’s decision with regard to the
       pension asset deduction is not clearly against the manifest weight of the evidence.
       Accordingly, we see no reason to disturb the Commission’s findings.

¶ 72                                C. Market-Based Rate of Return
¶ 73        The Utilities contend the Commission erred in adjusting the Utilities’ market-based rate
       of return on equity (ROE). Specifically, the Utilities contend the Commission’s adjustments
       to the Utilities’ market-based ROE not supported by substantial evidence, and was arbitrary,
       capricious and punitive.
¶ 74        In setting a utility’s ROE, the Commission is tasked with evaluating the employment of
       financial models that quantify the likely cost of attracting capital investment during the times
       that the rates will be in effect. Because the Utilities’ stock is not publicly traded, the financial
       models were applied to a proxy group of publicly traded natural gas utilities with risk profiles
       identified to be similar to those of Peoples Gas and North Shore Gas. The Commission noted
       the Utilities’ expert witness used a constant growth discount cash flow (DCF) model to
       determine a ROE estimate of 10.67%. The Staff’s expert used a non-constant DCF model to
       determine a ROE estimate; however, the Commission disregarded the Staff’s non-constant
       DCF model because its use was unsupported by the evidentiary record. The Commission
       determined it was clear in the evidentiary record that if the Staff had used a constant DCF
       model, the unadjusted ROE estimate would have been 11.76%. The Commission determined
       the most reasonable approach was to average the Staff’s unadjusted estimate of 11.76% and
       the Utilities’ unadjusted estimate of 10.67%, which averaged to a 10.73% estimated ROE.
       The Commission then made two types of downward adjustments to the ROE estimates,
       which equaled an authorized ROE of 10.33% for North Shore and 10.23% for Peoples Gas.
¶ 75        The first adjustment was based on a “financial risk adjustment” of 30 basis points for
       Peoples Gas and 20 basis points for North Shore. The Staff’s expert witness, Michael
       McNally, explained the Utilities had less financial risk than the publicly traded utilities in
       the proxy group. In order to determine the risk differential, McNally explained he compared
       the proxy group’s average actual credit rating to hypothetical credit ratings he estimated the
       Utilities would have if they recovered their revenue requirements in full. Finding the
       Utilities’ hypothetical credit ratings based on full revenue recovery were higher than the
       proxy group’s average actual credit rating, McNally and the Staff recommended the
       deductions adopted by the Commission above. The second adjustment was based on 10-point
       downward adjustments for each of two tariff riders approved by the Commission, Rider UEA
       and Rider VBA.
¶ 76        Our supreme court has noted a utility’s revenue requirement is based on a calculation of

                                                  -17-
       the utility’s:
                “operating costs, rate base, and allowed rate of return. 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 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). *** The revenue requirement represents the
                amount the company is permitted to recover from its customers in the rates it
                charges.” (Internal quotation marks omitted.) Citizens Utilities Co. of Illinois v.
                Illinois Commerce Comm’n, 124 Ill. 2d 195, 200-01 (1988).

¶ 77                                 1. Financial Risk Adjustment
¶ 78       The Utilities contend the financial risk adjustment to the Utilities’ ROE should be
       reversed. Specifically, the Utilities contend the adjustments were based on improper
       assumptions and an improper comparison between the Utilities’ ideal financial performance
       and the proxy group’s actual financial performance. The Utilities contend there was no basis
       for the Commission to consider comparisons between the Utilities and the proxy group for
       specific risk differentials. The Utilities note that for purposes of calculating the Utilities’
       ROE through financial models, the Commission accepted the gas group proxy as a
       reasonable proxy for the overall investment risk associated with the Utilities. Accordingly,
       the Utilities contend the Commission’s consideration of a comparison specific to financial
       risk was improper because the Commission did not also take into account other risk
       variations that may have offset any differences in financial risk.
¶ 79       The Utilities also contend it was patently unfair and an abuse of discretion for the
       Commission to assume full recovery of the revenue requirements when comparing the
       Utilities’ future financial performance with the actual average credit rating of the proxy
       group utilities. The Utilities contend their actual earnings are inherently uncertain because
       their rates are based on estimated revenue requirements. In support, the Utilities note they
       have significantly under recovered their revenue requirements in the past. In 2008, for
       example, Peoples Gas earned a return of 5.65% compared to its 10.19% authorized return,
       while North Shore earned 6.66% compared to its authorized return of 9.99%. Accordingly,
       the Utilities contend the Commission grossly overstated their projected financial
       performance and understated their financial risk when making the adjustments.
¶ 80       The Commission counters that it accepted the Staff’s testimony that the financial risk of
       the Utilities is lower than that of the proxy group. The Commission contends the purpose of
       the adjustment was to reflect the fact that the Utilities have, and will continue to have, in
       place several risk reducing factors that not all companies in the proxy group have. The
       Commission notes the Utilities’ own expert witness acknowledged that fact during the
       hearing. Noting the proxy continues to be both theoretical and a matter of opinion, the
       Commission contends the Utilities have not shown an opposite conclusion to the


                                                 -18-
       Commission’s decision to adjust the ROE was “clearly evident.” See Continental Mobile
       Telephone Co. v. Illinois Commerce Comm’n, 269 Ill. App. 3d 161, 171 (1994) (“On appeal
       from an order of the Commission, the appellant bears the burden of proving that it was not
       supported by substantial evidence. (220 ILCS 5/10-201(d), (e)(iv) (West 1992)). This
       standard is not met by merely showing that the evidence may support a different conclusion;
       it must be shown that the opposite conclusion is clearly evident.”).
¶ 81       The Commission’s findings of fact are to be considered prima facie true; its orders are
       considered prima facie reasonable; and the burden of proof on all issues raised in an appeal
       is on the appellant. See United Cities Gas Co., 163 Ill. 2d at 11. After reviewing the record
       below, we agree it was proper for the Commission to accept the Staff’s expert testimony that
       the financial risk of the Utilities at issue here is lower than that of the proxy group. Because
       we conclude the Utilities have failed to demonstrate an opposite conclusion regarding the
       Commission’s financial risk adjustment is clearly evident, we find the Commission did not
       err in making the adjustment to the Utilities’ estimated ROE. See Continental Mobile
       Telephone Co., 269 Ill. App. 3d at 171.

¶ 82                                     2. Rider Adjustment
¶ 83       Initially, we note a similar issue regarding an adjustment to the Utilities estimated ROE
       based on Rider VBA in its 2007 rate case is currently pending on appeal before the Second
       District.
¶ 84       The Utilities contend the additional 10-point adjustment to the ROE for Rider VBA,
       which was designed to ensure accurate recovery of the Utilities “margin” revenues regardless
       of how weather affected the Utilities’ sales of natural gas, and the 10-point adjustment to the
       ROE for Rider UEA, which was designed to ensure recovery of the Utilities’ uncollectible
       expenses, were duplicative and unnecessary. The Utilities note that to the extent the riders
       increase the likelihood that the Utilities would recover a greater portion of their future
       revenue requirements as compared to the proxy group, the Commission already assumed the
       Utilities would recover their future revenue requirements in full when it made the financial
       risk adjustment discussed above. Simply put, the Utilities suggest the adjustments for the
       riders double counted the alleged risk differential between the Utilities and the proxy group
       that the adjustments were designed to offset. The Utilities contend that the financial risk
       adjustments, in effect, assumed the existence of a “super rider” that would ensure the
       Utilities would earn their full revenue requirement regardless of any contingencies.
¶ 85       The Commission counters its decision to lower the ROE based on the rider was properly
       based on the evidence presented by McNally, the Staff’s expert witness on the issue. The
       Commission also disagrees with the Utilities’ contention that the risk adjustment was
       designed to remove all risk that a utility will be unable to recover its revenue requirement in
       full. In support, the Commission notes that under cost-based ratemaking, the authorized
       return on common equity is set equal to the investor required return, which is revealed
       through the price investors are willing to pay for that common stock. The Commission
       contends a ROE cannot be determined by past achieved returns alone.
¶ 86       The Commission also notes determining an appropriate cost of common equity is not a

                                                -19-
       matter of formula, but, instead, is a question of pragmatic business judgment to which the
       Commission’s decision is entitled to great weight. See Village of Apple River v. Illinois
       Commerce Comm’n, 18 Ill. 2d 518, 523 (1960).
¶ 87       We must agree with the Commission in this instance. As previously noted, we will not
       reevaluate the credibility or weight of the evidence on review; nor will we substitute our
       judgment for that of the Commission. Commonwealth Edison Co., 398 Ill. App. 3d at 514.
       Such deference is “especially appropriate in the area of fixing rates.” Iowa-Illinois Gas &
       Electric Co., 19 Ill. 2d at 442. Because we determine the Utilities have failed to demonstrate
       an opposite conclusion regarding the Commission’s rider adjustment is clearly evident, we
       find the Commission did not err in making the adjustment to the Utilities’ estimated ROE.

¶ 88                                    CONCLUSION
¶ 89       We affirm the Commission’s order in part, reverse the order in part, and remand for
       further proceedings consistent with this opinion.

¶ 90      Affirmed in part and reversed in part; cause remanded.




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