{ "id": 926976, "name": "ARCHER-DANIELS-MIDLAND COMPANY et al., Appellees, v. THE ILLINOIS COMMERCE COMMISSION et al., Appellants", "name_abbreviation": "Archer-Daniels-Midland Co. v. Illinois Commerce Commission", "decision_date": "1998-12-03", "docket_number": "Nos. 84898, 84899 cons.", "first_page": "391", "last_page": "402", "citations": [ { "type": "official", "cite": "184 Ill. 2d 391" } ], "court": { "name_abbreviation": "Ill.", "id": 8772, "name": "Illinois Supreme Court" }, "jurisdiction": { "id": 29, "name_long": "Illinois", "name": "Ill." }, "cites_to": [ { "cite": "166 Ill. 2d 111", "category": "reporters:state", "reporter": "Ill. 2d", "case_ids": [ 198920 ], "weight": 2, "year": 1995, "pin_cites": [ { "page": "138" }, { "page": "137", "parenthetical": "holding that the prohibition of single-issue ratemaking does not apply in relation to the use of rider mechanisms" } ], "opinion_index": 0, "case_paths": [ "/ill-2d/166/0111-01" ] }, { "cite": "45 Pub. Util. Rep. 4th 1", "category": "reporters:specialty", "reporter": "P.U.R.4th", "weight": 5, "year": 1981, "pin_cites": [ { "parenthetical": "UFAC order" }, { "page": "4" }, { "page": "19", "parenthetical": "stating that \"[i]t is absolutely essential, if fuel adjustment clauses are to be used correctly, that the manner by which a utility acquires, handles, and accounts for fuel supplies be wholly prudent and defensible\"" }, { "page": "20" }, { "page": "20", "parenthetical": "stating that a utility should, in assessing near- and long-term fuel requirements, consider factors such as operating performance of plants, alternative fuel source options, and changes in regulatory requirements" } ], "opinion_index": 0 }, { "cite": "163 Ill. 2d 1", "category": "reporters:state", "reporter": "Ill. 2d", "case_ids": [ 478100 ], "weight": 2, "year": 1994, "pin_cites": [ { "page": "12" }, { "page": "12" } ], "opinion_index": 0, "case_paths": [ "/ill-2d/163/0001-01" ] }, { "cite": "293 Ill. App. 3d 459", "category": "reporters:state", "reporter": "Ill. App. 3d", "case_ids": [ 847540 ], "weight": 2, "pin_cites": [ { "page": "466" } ], "opinion_index": 0, "case_paths": [ "/ill-app-3d/293/0459-01" ] } ], "analysis": { "cardinality": 804, "char_count": 19059, "ocr_confidence": 0.778, "pagerank": { "raw": 1.5575652220160572e-07, "percentile": 0.6763627918075532 }, "sha256": "c79e20ef0d7375c4d57786fe3b57b1afeaee83fbbf95767d5aa1065db4a77492", "simhash": "1:7a22df85e91f9bf0", "word_count": 3028 }, "last_updated": "2023-07-14T21:24:23.867941+00:00", "provenance": { "date_added": "2019-08-29", "source": "Harvard", "batch": "2018" }, "casebody": { "judges": [], "parties": [ "ARCHER-DANIELS-MIDLAND COMPANY et al., Appellees, v. THE ILLINOIS COMMERCE COMMISSION et al., Appellants." ], "opinions": [ { "text": "JUSTICE HEIPLE\ndelivered the opinion of the court:\nCentral Illinois Public Service Company (CIPS) and the Illinois Commerce Commission (Commission) appeal the decision of the appellate court (293 Ill. App. 3d 459) reversing the Illinois Commerce Commission\u2019s order allowing the use of CIPS\u2019s fuel adjustment clause (FAC) to recover costs associated with a fuel contract modification. We now reverse the judgment of the appellate court and hold that the fuel contract modification costs and associated carrying costs, or interest costs, are recoverable through an FAC.\nBACKGROUND\nIn 1975, CIPS entered into a long-term contract for the purchase of high-sulfur coal from AMAX Coal Company (AMAX). This contract, amended several times since 1975, provided that CIPS would purchase from AMAX\u2019s Delta Mine a minimum of 1.3 million tons of high-sulfur coal annually through December 31, 2002, for use in CIPS\u2019s Newton 1 generating unit. The initial price for the coal was fixed by the contract and was adjusted periodically through the use of preagreed escalators.\nThe primary source for the coal was AMAX\u2019s Delta Mine. However, the contract also allowed AMAX to deliver to CIPS coal from alternate sources so long as this coal was of the same or better quality as the Delta Mine coal. The contract did not allow CIPS to designate the source of this alternate source coal, and the contract price of the coal was not adjusted to reflect the actual cost of the alternate source coal to AMAX. Thus, any difference in contract price and market price accrued to the benefit of AMAX alone.\nBy 1993, the circumstances under which the contract was originally negotiated had significantly changed. First, the escalated cost of the high-sulfur coal from the Delta Mine contract significantly exceeded the market price of both high- and low-sulfur coal. Thus, AMAX was able to purchase alternate source coal on the open market and resell that coal to CIPS at the higher contract price, thereby depriving CIPS of the benefits of the lower market prices for coal.\nSecond, the scrubber at CIPS\u2019s Newton 1 generating unit where the Delta Mine high-sulfur coal was burned was deteriorating and needed to be either renovated or retired. This scrubber reduced sulfur dioxide emissions to levels permitted by state and federal environmental laws and enabled CIPS to burn the high-sulfur coal. If the scrubber was retired, then CIPS could no longer burn high-sulfur coal, but instead could burn only low-sulfur coal which did not require the use of a scrubber. Although CIPS could renovate the scrubber rather than retire it, the cost was in excess of $70 million along with $10 million in annual operating costs.\nGiven the above-market price for the Delta Mine coal and the deterioration of the scrubber, CIPS began negotiations with AMAX in an attempt to restructure the Delta Mine contract. After considering various options, CIPS concluded that the most cost-effective option was to retire the Newton 1 generating unit scrubber and restructure the Delta Mine contract to allow the purchase of low-sulfur coal.\nThe restructured agreement provided that CIPS could locate and negotiate with third-party coal suppliers. AMAX would then purchase this alternate source coal at market price, and resell the coal to CIPS with no mark up. Consequently, under the modified contract, CIPS would receive the benefit of lower market prices for alternate source coal. Additionally, CIPS could purchase low-sulfur coal, thereby eliminating the need for the deteriorating scrubber and saving the renovation costs. Finally, CIPS would not be required to purchase a minimum amount of coal in any year, but instead would have an open-ended obligation to eventually purchase 7.8 million tons. CIPS anticipated satisfying this obligation by the end of 2002.\nIn return for these contract modifications, CIPS agreed to pay AMAX a one-time payment of $70 million, an amount CIPS would finance itself at an annual interest rate of approximately 7.25%. The modified agreement, however, was contingent upon a finding by the Commission that the payment and carrying costs could be passed on to CIPS\u2019s customers through the FAC. Consequently, CIPS sought the Commission\u2019s approval. Appellees, Archer-Daniels-Midland Company, Marathon Oil Company, and Quantum Chemicals Company, collectively known as the Illinois Industrial Energy Consumers, intervened in the proceedings to challenge CIPS\u2019s proposal to pass the contract modification costs through the FAC.\nIn the proceedings before the Commission, CIPS produced evidence that in the period between 1996 and 2015, the contract modifications would produce a \u201cPresent Value of Revenue Requirements\u201d of approximately $128 million less than renovating the scrubber and continuing the use of high-sulfur coal under the Delta Mine contract terms. Ninety-four percent of these benefits would be realized by customers between 1996 and 2005.\nCIPS proposed to pass both the $70 million payment and the savings resulting from the contract restructuring through its FAC. The payment and carrying costs would be passed through the FAC by applying an $11.09 prepayment charge for each ton of coal purchased, up to a total of 7.8 million tons. This \u201cprepayment/ton\u201d charge, however, would be offset by the resulting savings from the contract restructuring. Thus, CIPS estimated that its customers would realize a savings of $4.5 million through the FAC in 1997 alone, a 4.6% reduction in the overall retail FAC charge for that year. Over the life of the contract, CIPS anticipated that its customers would realize a total net savings through the FAC of approximately $14 million. Finally, CIPS proposed that if its estimate of savings to customers was overly optimistic, it guaranteed that customers would not pay an amount in excess of the amount they would have paid had the Delta Mine contract not been restructured. In other words, CIPS guaranteed the Commission that in a worst case scenario, CIPS\u2019s customers would pay the same amount for fuel as they did under the original Delta Mine Contract.\nThe Commission ultimately approved both the contract modification and the passing of the payment and associated carrying costs through the FAC. In approving the use of the FAC, the Commission found that the payment of $70 million and associated carrying costs were incurred by CIPS directly in realizing fuel savings over the life of the AMAX coal contract. Using the FAC would allow customers who experience reduced FAC charges via the contract modifications to also pay the costs of reducing those FAC charges. Moreover, the Commission found that allowing the use of the FAC in this context would encourage the buying-out or restructuring of uneconomic contracts.\nThe appellate court, however, reversed the order of the Commission. The appellate court found that the restructuring cost was not a \u201cdirect cost of fuel,\u201d and the cost could therefore not be passed through the FAC. Secondly, the appellate court held that the decision of the Commission constituted improper single-issue ratemaking. Accordingly, the appellate court disallowed CIPS from passing the contract restructuring costs through the FAC.\nANALYSIS\nIn reviewing an order of the Commission, \u201c[t]he findings and conclusions of the Commission on questions of fact shall be held prima facie to be true and as found by the Commission [and] rules, regulations, orders or decisions of the Commission shall be held to be prima facie reasonable ***.\u201d 220 ILCS 5/10 \u2014 201(d) (West 1996). Indeed, the Commission is entitled to great deference because it is an administrative body possessing expertise in the field of public utilities. United Cities Gas Co. v. Illinois Commerce Comm\u2019n, 163 Ill. 2d 1, 12 (1994). However, the Commission\u2019s interpretation of a question of law is not binding on a court of review. United Cities Gas, 163 Ill. 2d at 12.\nSection 9 \u2014 220 of the Illinois Public Utilities Act (Act) states:\n\u201cNotwithstanding the provisions of Section 9 \u2014 201, the Commission may authorize the increase or decrease of rates and charges based upon changes in the cost of fuel used in the generation or production of electric power *** through the application of fuel adjustment clauses ***.\u201d (Emphasis added.) 220 ILCS 5/9 \u2014 220 (West 1996).\nGiven this statutory language, the contract restructuring cost and associated carrying costs may be passed to consumers through the use of an FAC if these costs are \u201ccosts of fuel.\u201d\nThe Illinois Administrative Code (Code) states that \u201ccosts of fuel\u201d include \u201cdirect cost[s] of fuel.\u201d 83 Ill. Adm. Code \u00a7 425.40(c)(1) (1996). Specifically, section 425.40(c)(1) provides:\n\u201cThe cost of fuel shall include the direct cost of fuel delivered at the generating plants. The direct fossil fuel costs are limited to costs entered into fuel expense Accounts #501 and #547 which have been cleared upon consumption from Fuel Stock account #151[.]\u201d (Emphasis added.) 83 Ill. Adm. Code \u00a7 425.40(c)(1) (1996).\nAdditionally, the Commission\u2019s order adopting a uniform fuel adjustment clause provides guidance as to what items may properly be flowed through an FAC as a \u201ccost of fuel.\u201d Re Uniform Fuel Adjustment Clauses, 45 Pub. Util. Rep. 4th 1 (1981) (UFAC order). In setting forth the purposes of an FAC, the UFAC order states:\n\u201cFuel costs represent a substantial portion of operating costs; in some instances, fuel costs alone comprise more than half of a utility\u2019s total operating costs. Any fluctuation in fuel costs has a significant impact on a utility\u2019s earnings unless some means exists to recoup these increased costs as quickly as possible. These fuel costs are a highly volatile expense item; more so than other expenses such as wages or maintenance. When the volatility factor is coupled with the magnitude of the fuel costs, one can readily conclude that the fuel adjustment clause is both a necessary and a proper regulatory tool to insure that both the customer and the utility receive the benefits of early recognition of changes in the cost of generating electricity.\u201d 45 Pub. Util. Rep. 4th at 4.\nThe appellate court interpreted this language as requiring that only \u201cdirect costs of fuel\u201d due to uncontrolled fluctuations in fuel prices beyond the control of a utility may be passed through an FAC. While we agree that one of the purposes of an FAC is to ameliorate the adverse effects of uncontrolled fuel price fluctuations, the UFAC order as a whole does not support such a limited use for an FAC.\nThe Commission in adopting the UFAC expressed concern that the use of FACs would discourage prudent purchasing of fuel by removing incentives for utilities to bargain for the lowest procurement prices. 45 Pub. Util. Rep. 4th at 19 (stating that \u201c[i]t is absolutely essential, if fuel adjustment clauses are to be used correctly, that the manner by which a utility acquires, handles, and accounts for fuel supplies be wholly prudent and defensible\u201d). Stated another way, a utility\u2019s profits are not adversely affected by increased fuel costs if those costs can be directly passed on to consumers.\nGiven this potential for disincentive, the Commission stressed in the UFAC order that utilities must engage in prudent purchasing practices:\n\u201cA utility\u2019s capacity to address both near and long-term fuel requirements requires an effective planning and decision model by production and planning personnel which will consider load forecasting, operating performance of plants, fuel mix, fuel prices, transportation costs, and variations in load requirements. Other factors such as fuel availability outlook, alternative fuel source options, and changes in regulatory requirements are part of the model. ***\n* * *\nFuel contracts must and will be constantly monitored by the utilities to insure and review fuel quantity and quality control, sizing of fuel stock levels, charging of proper prices, and correct administration of price escalation provisions.\u201d (Emphasis added.) 45 Pub. Util. Rep. 4th at 20.\nRelying upon this language, the Commission in Illinois Commerce Comm\u2019n v. Interstate Power Co., Ill. Commerce Comm\u2019n Order 92 \u2014 0335 (September 25, 1996), allowed a utility to flow a contract buy-out cost through its FAC as a \u201ccost of fuel.\u201d In deciding whether this recovery mechanism was permissible, the Commission found that allowing the pass-through of the buy-out cost was consistent with the spirit of the UFAC. Specifically, allowing the pass-through would foster prudent purchasing practices by encouraging the efficient use of resources and encouraging utilities to alter uneconomic contracts. Interstate Power, Ill. Commerce Comm\u2019n Order 92 \u2014 0335 (September 25, 1996).\nAlthough Interstate Power explicitly stated that the decision was \u201cfor the purposes of this docket only,\u201d the Commission in the present case found that Interstate Power\u2019s rationale applied with equal force to the present case. We agree.\nThe $70 million payment and associated carrying costs in the present case were incurred by CIPS in an attempt to reduce the cost of fuel to its customers. CIPS was free to leave the uneconomic Delta Mine contract unaltered. However, CIPS, by engaging in \u201cprudent purchasing\u201d practices, monitored its contract and sought to change it when it became disadvantageous to its customers. This is precisely the type of prudent contract monitoring which the Commission sought to encourage in the UFAC order. Indeed, disallowing the flow-through in this case would create the very danger about which the Commission was concerned when it adopted the UFAC, namely, removing incentives for utilities to engage in prudent purchasing practices.\nAlthough respondents argue that the contract restructuring was motivated by the nonfuel savings realized by the retirement of the scrubber, we find that costs of a fuel contract modification which produce nonfuel as well as fuel savings may be appropriately flowed through an FAC. As stated in the UFAC order, prudent fuel purchasing by a utility requires it to consider numerous factors in assessing the benefits of its fuel procurement practices. 45 Pub. Util. Rep. 4th at 20 (stating that a utility should, in assessing near- and long-term fuel requirements, consider factors such as operating performance of plants, alternative fuel source options, and changes in regulatory requirements). Thus, CIPS was not required to consider the benefits of the contract restructuring in a vacuum. Rather, CIPS was free to choose the contract modifications which produced the greatest amount of overall savings, both fuel and nonfuel. Consequently, the contract restructuring costs are \u201ccosts of fuel\u201d as contemplated in the UFAC order and section 9 \u2014 220 of the Act (220 ILCS 5/9 \u2014 220 (West 1996)), regardless of whether CIPS realizes nonfuel benefits from the contract restructuring.\nWe also disagree with the appellate court\u2019s conclusion that the Commission\u2019s refusal to allow entry of the contract restructuring costs in \u201cFuel Stock Account #151\u201d \u201cdemonstrates that recovery is not proper through the FAC.\u201d 293 Ill. App. 3d at 466. Section 425.40(c)(1) of the Code limits \u201cdirect fossil fuel costs\u201d to costs which have been cleared upon consumption from account No. 151. 83 Ill. Adm. Code \u00a7 425.40(c)(1) (1996). The Commission concluded that, although the restructuring cost may be flowed-through the FAC, the costs were not \u201cfuel stock\u201d and could not therefore be entered into account No. 151.\nThe Commission\u2019s conclusion that the contract restructuring costs were not classifiable as \u201cfuel stock\u201d does not imply that these costs may not be passed through an FAC. Although section 425.40(c)(1) limits \u201cdirect\u201d costs of fuel to costs cleared from consumption from account No. 151, the category of costs passable through an FAC is broader than \u201cdirect\u201d costs of fuel. Indeed, the language of section 9 \u2014 220 of the Act requires only that a recoverable cost be a \u201ccost of fuel.\u201d 220 ILCS 5/9 \u2014 220 (West 1996). Consequently, at most the Commission\u2019s accounting treatment evidences its belief that the contract restructuring costs were not \u201cdirect\u201d costs of fuel. However, as already shown from the language of the UFAC order and section 9 \u2014 220 of the Act (220 ILCS 5/9 \u2014 220 (West 1996)), \u201ccosts of fuel\u201d recoverable via an FAC are not limited to \u201cdirect\u201d costs. See 83 Ill. Adm. Code \u00a7 425.40(c)(1) (1996) (stating that \u201ccost of fuel shall include direct costs of fuel\u201d (emphasis added)). Therefore, the Commission\u2019s accounting treatment does not alter our conclusion that the contract modification costs may be passed through an FAC as \u201ccosts of fuel.\u201d\nFinally, we also find the appellate court erred when it held that the decision of the Commission resulted in improper single-issue ratemaking. In a general base rate proceeding, the rule against single-issue ratemaking requires that the Commission \u201cexamine all elements of the revenue requirement formula to determine the interaction and overall impact any change will have on the utility\u2019s revenue requirement.\u201d Citizens Utility Board v. Illinois Commerce Comm\u2019n, 166 Ill. 2d 111, 138 (1995). However, this rule does not apply \u201cexcept in the context of a complete base rate proceeding.\u201d Citizens Utility Board, 166 Ill. 2d at 137 (holding that the prohibition of single-issue ratemaking does not apply in relation to the use of rider mechanisms). It is undisputed that the proceeding before the Commission was not a complete base rate proceeding. Thus, the rule against single-issue ratemaking has no application in the present case.\nIn sum, we hold that contract restructuring costs and associated carrying costs are \u201ccosts of fuel.\u201d As such, the costs may be recovered through the use of an FAC.\nCONCLUSION\nFor the reasons stated, the judgment of the appellate court is reversed and the order of the Commission is confirmed.\nAppellate court judgment reversed;\nCommission order confirmed.\nJUSTICES BILANDIC and NICKELS took no part in the consideration or decision of this case.\nAn FAC \u201cis a tariff provision, approved by the commission in advance, as a policy option, whereby a change in certain fuel costs and incidental costs thereto will automatically permit a change in the price charged consumers, without the delay and expense of a formal regulatory hearing. This mechanism eases administrative burdens and reduces the likelihood of financial jeopardy of the utility during adverse economic conditions.\u201d Adoption of Uniform Fuel Adjustment Clause(s), Ill. Commerce Comm\u2019n Order 78\u2014 0457 (November 10, 1981).", "type": "majority", "author": "JUSTICE HEIPLE" } ], "attorneys": [ "John E Kelliher, Special Assistant Attorney General, of Chicago, for appellant Illinois Commerce Commission.", "David J. Rosso, Christopher W Flynn and Thomas D. Brooks, of Jones, Day, Reavis & Pogue, of Chicago, for appellant Central Illinois Public Service Co.", "Edward C. Fitzhenry, of Lueders, Robertson & Konzen, of Granite City, for appellees." ], "corrections": "", "head_matter": "(Nos. 84898, 84899 cons.\nARCHER-DANIELS-MIDLAND COMPANY et al., Appellees, v. THE ILLINOIS COMMERCE COMMISSION et al., Appellants.\nOpinion filed December 3, 1998.\nBILANDIC and NICKELS, JJ., took no part.\nJohn E Kelliher, Special Assistant Attorney General, of Chicago, for appellant Illinois Commerce Commission.\nDavid J. Rosso, Christopher W Flynn and Thomas D. Brooks, of Jones, Day, Reavis & Pogue, of Chicago, for appellant Central Illinois Public Service Co.\nEdward C. Fitzhenry, of Lueders, Robertson & Konzen, of Granite City, for appellees." }, "file_name": "0391-01", "first_page_order": 403, "last_page_order": 414 }