Opinion filed December 11, 2013

Modified upon denial of NOS. 4-12-1008, 4-13-0029 cons. rehearing January 28, 2014.

IN THE APPELLATE COURT

OF ILLINOIS

FOURTH DISTRICT

AMEREN ILLINOIS COMPANY, ) Direct Review of Petitioner, ) Order of the v. (No. 4-12-1008) ) Illinois Commerce ILLINOIS COMMERCE COMMISSION; THE ) Commission CITIZENS UTILITY BOARD; AARP; THE ) No. 12-0001 COMMERCIAL GROUP (Best Buy Company Inc., ) ) J.C. Penney Corporation, Inc., Macy's, Inc., Sam's ) West, Inc., and Wal-Mart Stores, Inc.); THE ) INDUSTRIAL ENERGY CONSUMERS (Air ) Products and Chemicals Company, Archer-Daniels- ) Midland Company, Caterpillar, Inc., CCPS ) Transportation, LLC, GBC Metals, LLC, Keystone ) Consolidated Industries, Inc., Marathon Petroleum ) ) Company, LP, Olin Corporation, Tate and Lyle ) Ingredients Americas, Inc., University of Illinois, ) Viscofan USA, Inc., and Washington Mills Hennepin, ) Inc.); THE OFFICE OF THE ATTORNEY ) GENERAL; and THE PEOPLE OF THE STATE OF ) ILLINOIS, ) Respondents. ) ) ---------------------------------------------------------------- ) AMEREN ILLINOIS COMPANY, ) No. 12-0293 Petitioner, ) v. (No. 4-13-0029) ) ILLINOIS COMMERCE COMMISSION, THE ) CITIZENS UTILITY BOARD, AARP, THE OFFICE ) ) OF THE ATTORNEY GENERAL, and THE PEOPLE ) OF THE STATE OF ILLINOIS, ) Respondents. )

JUSTICE HOLDER WHITE delivered the judgment of the court, with opinion. Justices Appleton and Pope concurred in the judgment and opinion. OPINION ¶1 In January 2012, Ameren Illinois Company (Ameren) filed its initial application

with the Illinois Commerce Commission (Commission) to establish a performance-based rate

tariff under the authority of section 16-108.5 of the Public Utilities Act (Utilities Act), commonly

referred to as the Energy Infrastructure Modernization Act (Modernization Act) (220 ILCS 5/16-

108.5 (West 2012)), enacted by Public Act 97-616 (Pub. Act 97-616, § 10 (eff. Oct. 26, 2011)).

Following a September 2012 evidentiary hearing, the Commission issued a written decision in

which, among other things, it (1) rejected and subsequently reduced Ameren's proposed rate of

common equity so that it was more consistent with the common equity of Ameren's holding

company, Ameren Company (holding company); (2) considered Ameren's accumulated deferred

income taxes (ADIT) for projected plant additions in calculating Ameren's rate base; and (3)

decreased Ameren's rate base by unused vacation pay accrued by Ameren employees.

¶2 In April 2012, Ameren filed its first annual update with the Commission. In

December 2012, the Commission reaffirmed the aforementioned findings.

¶3 On appeal, Ameren asserts the Commission made three reversible errors in

reaching its decision, including (1) considering the capital structure of Ameren's holding

company rather than the actual capital structure of Ameren when determining rate base; (2)

reducing Ameren's rate base by ADIT for projected plant additions; and (3) decreasing Ameren's

rate base by unused vacation pay accrued by Ameren employees.

¶4 We affirm.

¶5 I. BACKGROUND

¶6 Ameren is a public utility that distributes electricity and gas to customers in

Illinois. As a public utility, Ameren's rates are subject to regulation by the State of Illinois

pursuant to the Utilities Act (220 ILCS 5/9-101 to 22-503 (West 2012)), through which the

-2- General Assembly has delegated to the Commission the authority to review the rates suggested

by public utilities to determine whether those rates are "just and reasonable." 220 ILCS 5/9-

201(c) (West 2012).

¶7 A. Modernization Act

¶8 In 2011, the General Assembly passed the Modernization Act (220 ILCS 5/16-

108.5 (West 2012)) as a provision of the Utilities Act (220 ILCS 5/1-101 to 22-503) (West

2012)). The Modernization Act applies to electric utilities or combination gas and electric

utilities serving more than 1 million customers in Illinois that voluntarily undertake to create

customer assistance programs and invest in an infrastructure program that creates Illinois jobs.

220 ILCS 5/16-108.5(b) (West 2012). To participate, a utility company must commit to one of

the following investment plans. The first option requires the utility company, within 5 years, to

invest $1.3 billion "in electric system upgrades, modernization projects, and training facilities"

and, within 10 years, to invest $1.3 billion "to upgrade and modernize its transmission and

distribution infrastructure." 220 ILCS 5/16-108.5(b)(1)(A), (b)(1)(B) (West 2012). The second

option requires the utility company, over a 10-year period, to invest $265 million "in electric

system upgrades, modernization projects, and training facilities" and to invest $360 million "to

upgrade and modernize its transmission and distribution infrastructure." 220 ILCS 5/16-

108.5(b)(2)(A), (b)(2)(B) (West 2012). The incentive for utility companies to participate in this

program is that the statute allows the company to recover its expenditures through the

ratemaking process. 220 ILCS 5/16-108.5(b) (West 2012).

¶9 B. Ameren's Initial Application Under the Modernization Act

¶ 10 In January 2012, Ameren filed with the Commission a petition for approval of its

"Modernization Action Plan-Pricing Tariff" pursuant to the Modernization Act (Illinois

-3- Commerce Commission case No. 12-1001 (No. 12-1001)). Several parties intervened, including

(1) the Attorney General on behalf of the People of the State of Illinois, (2) the Citizens Utility

Board, (3) the American Association of Retired Persons (AARP), (4) the Illinois Industrial

Energy Consumers, and (5) the Commercial Group. In September 2012, following an

evidentiary hearing and briefing by all parties, including Commission staff, the Commission

approved Ameren's application with several modifications, including (1) rejecting and

subsequently reducing Ameren's proposed rate of common equity so that it was more consistent

with the common equity of Ameren's holding company, Ameren Company; (2) considering

ADIT on projected plant additions in calculating Ameren's rate base; and (3) decreasing

Ameren's rate base by unused vacation pay accrued by Ameren employees. Ameren filed an

application for rehearing, which the Commission denied in October 2012. Ameren then filed a

timely notice of appeal challenging, among other issues, the Commission's findings with regard

to Ameren's (1) rate of common equity in calculating actual capital structure and (2) ADIT on

projected plant additions. This court docketed Ameren's appeal as No. 4-12-1008.

¶ 11 C. Ameren's Annual Update Filing

¶ 12 In April 2012, while Ameren's application in No. 12-1001 was still pending,

Ameren filed its first annual update with the Commission as required by the Modernization Act

(Illinois Commerce Commission case No. 12-0293 (No. 12-0293)). In December 2012, the

Commission issued its written findings consistent with No. 12-1001. The Commission then

denied Ameren's January 2013 motion requesting a rehearing. Ameren filed a timely notice of

appeal challenging, among others issues, the Commission's decisions with regard to (1) reducing

Ameren's common equity as more consistent with Ameren's holding company, (2) considering

ADIT on projected plant additions in calculating rate base, and (3) decreasing Ameren's rate base

-4- by unused vacation pay accrued by Ameren employees. Ameren then filed a timely notice of

appeal, which this court docketed as No. 4-13-0029. We have consolidated both cases for

review.

¶ 13 D. May 2013 Amendment to the Modernization Act

¶ 14 In May 2013, Public Act 98-15 (Pub. Act 98-15, § 5 (eff. May 22, 2013))

amended the Modernization Act, and those amendments applied retroactively to the proceedings

at issue in the present cases. 220 ILCS 5/16-108.5 (West 2012) (enacted by Public Act 98-15

(Pub. Act 98-15, § 5 (eff. May 22, 2013))). Ameren subsequently filed motions in both cases to

have several issues declared moot, and the appellees did not object. Thus, this court will address

only the remaining issues.

¶ 15 II. ANALYSIS

¶ 16 On appeal, Ameren asserts the Commission erred by (1) considering the capital

structure of Ameren's holding company rather than the actual capital structure of Ameren when

determining rate base; (2) reducing Ameren's rate base by ADIT for projected plant additions;

and (3) decreasing Ameren's rate base by unused vacation pay accrued by Ameren employees.

We address each of these contentions in turn.

¶ 17 A. Standard of Review

¶ 18 This is a case of first impression, requiring this court to review and interpret the

statutory provisions of the Modernization Act in the context of the Utilities Act. Issues of

statutory interpretation are reviewed de novo. People ex rel. Madigan v. Illinois Commerce

Comm'n,

,

(2008). However, the Utilities Act provides

that the Commission's findings of fact are considered prima facie reasonable and the burden of

proof on all issues raised upon appeal is on the challenging party. 220 ILCS 5/10-201(d) (West

-5- 2012). Review of the Commission's factual findings is generally limited to whether (1) the

Commission acted within its authority, (2) the Commission made adequate findings to support its

position, (3) the decision is supported by substantial evidence, and (4) constitutional rights have

been violated. People ex rel. Madigan v. Illinois Commerce Comm'n,

,

. Substantial evidence consists of evidence a reasoning mind would accept

as sufficient to support the challenged finding; it is more than a scintilla of evidence but requires

something less than a preponderance of the evidence. Central Illinois Public Service Co. v.

Illinois Commerce Comm'n,

,

(1994).

¶ 19 Given the highly technical nature of calculating the costs incurred by a public

utility, judicial deference is "especially appropriate in the area of fixing rates." Iowa-Illinois Gas

& Electric Co. v. Illinois Commerce Comm'n,

,

(1960).

The Commission's findings of fact will not be overturned unless they are against the manifest

weight of the evidence. Commonwealth Edison Co. v. Illinois Commerce Comm'n,

,

(2010). When the Commission's decision presents a question

of mixed law and fact, we review the Commission's order under the clearly erroneous standard.

People ex rel. Madigan v. Illinois Commerce Comm'n,

,

. "The clearly erroneous standard of review lies between the manifest weight of the

evidence standard and the de novo standard, and as such, it grants some deference to the agency's

decision." People ex rel. Madigan v. Illinois Commerce Comm'n,

,

. In that circumstance, the reviewing court must be left with a "definite and

firm conviction" that the Commission committed a mistake. (Internal quotation marks omitted.)

People ex rel. Madigan v. Illinois Commerce Comm'n,

,

.

-6- ¶ 20 B. Issues Raised by Ameren

¶ 21 1. Actual Capital Structure

¶ 22 Ameren argues the Commission erred by imputing to Ameren the actual capital

structure of Ameren's holding company. Actual capital structure consists of (1) short-term debt,

(2) long-term debt, and (3) common equity. See, e.g., People ex rel. Madigan v. Illinois

Commerce Comm'n,

,

. The parties' chief

contention on appeal is the rate of common equity adopted by the Commission.

¶ 23 In No. 12-1001, in determining its actual capital structure, Ameren estimated its

common equity at 54.30%, while its holding company had common equity in the amount of

52.24%. Commission staff estimated Ameren's common equity at 51.49%, a figure adopted by

the Commission after an extensive hearing. In No. 12-0293, Ameren estimated its common

equity at 54.85%, while its holding company had common equity in the amount of 51.05%.

Commission staff estimated Ameren's common equity at 51%, a figure adopted by the

Commission. In both instances, the Commission adopted for Ameren a common equity figure

below that of the holding company.

¶ 24 In adopting the respective rates of common equity, the Commission made detailed

findings. In No. 12-1001, the Commission noted Ameren had a lower overall operating risk than

its holding company due to Ameren's lack of competition and participation in the Modernization

Act; thus, the Commission found that adopting the common equity ratio suggested by Ameren

would ultimately expose Ameren to more risk than its holding company because the percentage

of common equity was too high for a company that possessed less operating risk. Ameren's

credit rating had also recently been increased by Moody's Investors Service, which gave Ameren

the ability to obtain more favorable rates. After considering Ameren's advantageous regulatory

-7- environment, the Commission found Ameren's rate unreasonable and adopted the Commission

staff's recommended rate, which the Commission deemed more reasonable.

¶ 25 In No. 12-0293, the Commission deferred, in part, to its ruling in No. 12-1001.

The Commission noted other utilities with a similar credit rating had much lower common equity

rates in the range of 40%, which indicated a lower degree of financial risk. The Commission

commented it was in Ameren's best interests to use a capital structure with higher common

equity because it would allow Ameren a greater return on its capital while leaving ratepayers to

shoulder the increased cost of capital. Additionally, in No. 12-0293, the Commission stated,

"individually, the concerns raised by Staff are insufficient to win the day. But cumulatively, the

Commission is persuaded that Staff's imputed capital structure is appropriate."

¶ 26 Subsection (c)(2) of the Modernization Act requires formula rates to "[r]eflect the

utility's actual capital structure for the applicable calendar year, excluding goodwill, subject to a

determination of prudence and reasonableness consistent with Commission practice and law."

220 ILCS 5/16-108.5(c)(2) (West 2012). Section 9-230 of the Utilities Act provides, "In

determining a reasonable rate of return upon investment for any public utility in any proceeding

to establish rates or charges, the Commission shall not include any (i) incremental risk, [or] (ii)

increased cost of capital *** which is the direct or indirect result of the public utility's affiliation

with unregulated or nonutility companies." 220 ILCS 5/9-230 (West 2012).

¶ 27 Ameren asserts the Commission failed to follow the plain language of the statute

by ignoring Ameren's "actual capital structure" and instead relying upon the capital structure of

Ameren's holding company. Additionally, Ameren reasons the statutory language requires the

Commission to presume Ameren's proposed actual capital structure is appropriate and that the

presumption can only be overcome if the Commission reviews the rate and finds it unreasonable.

-8- Ameren contends the Commission not only failed to make an express finding of

unreasonableness but also improperly shifted the burden to Ameren to prove the reasonableness

of its rates. Finally, Ameren argues its common equity rate should be higher because the

regulatory environment insulated Ameren from its holding company's greater risk profile.

¶ 28 The Commission, in turn, argues the statutory language does not create a

presumption of validity but instead provides the Commission discretion to find Ameren's

proposed actual capital structure unreasonable, authority which the Commission exercised in

reaching its decision. Specifically, the Commission argues section 9-230 of the Utilities Act

(220 ILCS 5/9-230 (West 2012)) grants the Commission the authority to set reasonable rates on

return of investments. The Commission further contends, though it did not make an express

finding of unreasonableness, its detailed finding implied that it found Ameren's proposals to be

unreasonable due, in part, to the inconsistency between Ameren's and its holding company's rates

of common equity.

¶ 29 The plain language of the statute provides the Commission with the discretion to

determine whether Ameren's proposed actual capital structure is prudent and reasonable. We

disagree with Ameren's contention that the statutory language creates a presumption of

reasonableness when read in conjunction with provisions of the Utilities Act. See 220 ILCS 5/9-

230 (West 2012) (the Commission has the authority to determine the reasonableness of a utility's

rate of return). We also disagree the Commission either failed to make a finding of

reasonableness or shifted the burden of proof onto Ameren to prove the reasonableness of the

rate of common equity. The parties presented extensive evidence and the Commission

determined the Commission staff's position was reasonable, thus rejecting Ameren's proposed

rates as unreasonable. Therefore, we conclude the Commission both possessed and exercised its

-9- authority in adopting the Commission staff's recommendation. We must now determine whether

the Commission's findings of fact were against the manifest weight of the evidence.

Commonwealth Edison Co.,

,

.

¶ 30 "Generally, equity is a more expensive form of capital than debt." Illinois Bell

Telephone Co. v. Illinois Commerce Comm'n,

,

(1996). "[B]ecause debt payments are generally tax deductible while dividend payments are not,

debt costs less than equity." Citizens Utility Board v. Illinois Commerce Comm'n,

,

(1995). In other words, "the more equity in a utility's

capital structure, the higher the ROR [rate of return] must be to cover the cost of capital."

Illinois Bell Telephone Co.,

,

(citing Citizens Utility

Board,

,

). "Reasonable persons will purchase a

corporation's securities only if they expect to receive later their initial investment plus a

reasonable return. When they invest, they understand that they risk the possibility that the

corporation may go out of business, and the investors may lose all or part of their investments.

As the perceived risk of loss increases, the amount of return investors demand increases."

Citizens Utility Board,

,

.

¶ 31 The common equity figures adopted by the Commission permitted Ameren a

favorable equity rate, better than other utilities with the same credit rating, and reflected

Ameren's low-risk regulatory environment. To allow Ameren to obtain a higher rate of common

equity under these circumstances would, as the Commission explained, allow Ameren a greater

return on its capital while leaving ratepayers to shoulder the increased cost of capital. Because

Ameren has decreased risk due to its regulatory environment and lack of competition, it stands to

reason investors would expect a lesser rate of return on their investment. Additionally, the

- 10 - record reflects the Commission did not adopt the actual capital structure of the holding company

in setting Ameren's rates. In No. 12-1001, the holding company's common equity was 52.24%,

but the Commission implemented a rate of 51.49% for Ameren. Likewise, in No. 12-0293, the

holding company's common equity was 51.05%, but the Commission adopted a common equity

rate of 51% for Ameren. In both cases, the common equity was set just below the rate of the

holding company, which illustrates the Commission's finding that Ameren has less risk than the

holding company and, thus, less need for higher rates of common equity.

¶ 32 The Commission acted within its authority and made adequate, detailed findings

on the substantial evidence presented. Therefore, we conclude the Commission did not err in

finding that Ameren's rate was unreasonable and its subsequent adoption of the modified rate of

common equity in both cases.

¶ 33 2. Accumulated Deferred Income Taxes

¶ 34 Ameren contends the Commission erred by reducing Ameren's rate base by ADIT

for projected plant additions. "ADIT quantifies the income taxes that are deferred when the tax

law provides for deductions with respect to an item in a year other than the year that the item is

treated as an expense for financial reporting purposes." (Internal quotation marks omitted.)

Ameren Illinois Co. v. Illinois Commerce Comm'n,

,

. For regulated utilities, ADIT reduces the utility's rate base because it is treated as no-cost

capital. Ameren Illinois Co.,

,

. In other words,

ADIT represents taxes payable in the future that provide a source of funds the utility can use

until such time the taxes become due.

¶ 35 Subsection (c)(6) of the Modernization Act requires participating utilities to

present to the Commission:

- 11 - "final data based on its most recently filed FERC Form 1 [(Annual Report of

Major Electric Utilities as required by the Federal Energy Regulatory

Commission)], plus projected plant additions and correspondingly updated

depreciation reserve and expense for the calendar year in which the tariff and data

are filed, that shall populate the performance-based formula rate and set the initial

delivery services rates under the formula." 220 ILCS 5/16-108.5(c)(6) (West

2012).

Additionally, the statute provides "[n]othing in this Section is intended to allow costs that are not

otherwise recoverable to be recoverable by virtue of inclusion in FERC Form 1." 220 ILCS

5/16-108.5(c)(6) (West 2012).

¶ 36 When the Commission calculated Ameren's rate base, it deducted ADIT for

projected plant additions, which reduced Ameren's rate base by over $100 million in No. 12-

1001 and nearly $44 million in No. 12-0293. An AARP witness, in reaching the $44 million

figure, determined "the existence of 50% bonus depreciation in 2012 provides [Ameren] with a

tax deduction equal to one-half of the amount of additions to plant in service, which would lead

to growth in the balance of ADIT in 2012 well in excess of growth that would take place in

absence of bonus depreciation." Witnesses for Commission staff and the Citizens Utility Board

suggested similar adjustments.

¶ 37 Ameren argues the Modernization Act did not provide the Commission with the

authority to deduct ADIT because, while the statute provides guidance for other adjustments, the

statute fails to mention an adjustment for ADIT. Ameren further asserts the omission of ADIT

adjustments in the statute was proper because ADIT does not represent "transparent information"

required for calculating formulas under the Modernization Act, which it illustrates with the

- 12 - experts' varying approximations of ADIT ranging from $108 million to $173 million. Moreover,

Ameren explains the reconciliation process in the Modernization Act eliminated the need for the

traditional ADIT adjustment because the reconciliation rate relies upon "actual costs" incurred by

Ameren in supplying gas and electricity.

¶ 38 The Commission contends it is common practice to make ADIT adjustments to a

rate base, and the Commission has the authority under the Modernization Act to rely on its

common practices in determining a just and reasonable rate. 220 ILCS 5/16-108.5(c)(6) (West

2012). The Commission notes Ameren used ADIT for years in calculating its rate base and

points out that only now under the Modernization Act does Ameren seek to exclude this

adjustment. While the Commission agrees the statute does not expressly allow an adjustment for

ADIT, the Commission explains the statute does not expressly disallow the adjustment, but

authorizes the Commission to exercise its discretion in determining just and reasonable rates.

¶ 39 The Modernization Act expressly prohibits a utility from recovering above and

beyond what would normally be recoverable in a ratemaking case. 220 ILCS 5/16-108.5(c)(6)

(West 2012); see also Commonwealth Edison Co.,

,

(The Utilities Act "requires the Commission to ensure that a utility's approved rate base does not

exceed the investment value that the utility actually uses to provide service."). The Commission

asserts that ignoring the ADIT figure would do just that—allow Ameren to recover an unjust and

unreasonable rate base that has been inflated by no-cost capital for the benefit of Ameren. We

agree. Omitting ADIT from the rate base calculation would allow Ameren what amounts to an

interest-free loan at the ratepayers' expense that would artificially increase Ameren's rates until

the next reconciliation process, a result which is neither just nor reasonable for ratepayers. As

Ameren noted, the reconciliation process will allow Ameren to recover its actual costs of the

- 13 - forecasted ADIT for projected plant additions in the event of a miscalculation during the

ratemaking process.

¶ 40 As it was consistent with the common practice of the Commission to include

ADIT in the ratemaking process, we conclude the Commission did not err by including the ADIT

adjustment for projected plan additions in its ratemaking calculation.

¶ 41 3. Vacation Pay

¶ 42 Ameren's final argument on appeal is that the Commission erred in determining

accrued but unused vacation pay, an amount of more than $12 million, was an operating reserve

that should be deducted from the rate base. We begin by noting Ameren did not challenge this

issue in No 12-1001. Instead, this argument was presented for the first time on appeal in No. 12-

0293.

¶ 43 Ameren asserts the Commission had the discretion in the proceedings at issue in

No. 12-0293 to alter the rate base by removing the reduction for accrued vacation pay but cites

no authority in support of this argument. Additionally, Ameren contends the Commission issued

a conclusory finding that accrued vacation pay was an operating reserve and that the finding was

against the manifest weight of the evidence.

¶ 44 We initially note it has not been consistent with the Commission's practice or law

to reduce a public utility's rate base by accrued vacation pay; in fact, the Commission has only

done so in this case and in Commonwealth Edison's related case (Illinois Commerce

Commission No. 11-0721, order of May 29, 2012), which is now pending on appeal. The

Commission's assertion that accrued but unused vacation pay results in additional monies for

Ameren's use is suspect given Ameren's liabilities associated with the funds. However, because

- 14 - of our discussion below, we are not required to decide whether a reduction of the rate base by

accrued but unused vacation pay is appropriate.

¶ 45 We agree with the Commission's argument that it lacked authority in No. 12-0293

to recalculate the rate base during the reconciliation proceedings. Subsection (c) of the

Modernization Act pertains to the establishment of the initial performance-based formula rate,

while subsection (d) governs proceedings during the annual reconciliation process. 220 ILCS

5/16-108.5(c), (d) (West 2012). Subsection (d)(1) provides "[t]he first such reconciliation is not

intended to provide for the recovery of costs previously excluded from rates based on a prior

Commission order finding of imprudence or unreasonableness." 220 ILCS 5/16-108.5(d)(1)

(West 2012). Under subsection (d)(3), "the Commission shall not *** have the authority in a

proceeding under this subsection (d) to consider or order any changes to the structure or

protocols of the performance-based formula rate approved pursuant to subsection (c) of this

Section." 220 ILCS 5/16-108.5(d)(3) (West 2012). In other words, the plain, unambiguous

language of subsections (d)(1) and (d)(3) prohibited the Commission from reconsidering the

initial performance-based formula rate during the first annual reconciliation proceeding at issue

in No. 12-0293. 220 ILCS 5/16-108.5(d)(1), (d)(3) (West 2012).

¶ 46 We therefore conclude the Commission lacked the authority to recalculate the rate

base during the first reconciliation proceeding and properly refused to alter the rate base by

removing the calculation for accrued but unused vacation pay.

¶ 47 III. CONCLUSION

¶ 48 For the reasons stated above, we affirm the findings of the Commission.

¶ 49 Affirmed.

- 15 -