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July 12, 2001

No. 3--00--0444

MODIFIED UPON DENIAL OF REHEARING

Petitioner Illinois-American Water Company (Illinois-American)appeals a decision of the Illinois Commerce Commission (Commission)in a case Illinois-American initiated under the Public UtilitiesAct (Act) (220 ILCS 5/1-101 et seq. (West 1998)). Illinois-American sought permission to merge with Northern Illinois WaterCorporation (Northern Illinois) and to recover certain merger costsfrom its ratepayers. While approving the merger, the Commissionheld that only costs directly related to the provision of servicecould be recovered from ratepayers. We affirm.

FACTS 

Illinois-American filed an application in 1999 seekingapproval of its merger with Northern Illinois. Each utility was asubsidiary of American Works Company, Inc. (American Works), aholding company whose water utility subsidiaries serve more than 10million people in 23 states. Through the Commission's order inDocket No. 99-0093 (1999), the merger was approved. Prior to themerger, Illinois-American served approximately 146,000 customers inPeoria, Pekin, Cairo and Alton. Northern Illinois served 62,000customers in Champaign, Streator, Sterling and Pontiac.

Illinois-American alleged that the merger was undertaken forthe sole purpose of benefitting its consumers through cost savingsand efficiencies. Evidence produced by Illinois-American projecteda savings to Illinois-American consumers of $21,262,234 for thefirst 10 years following the merger. The majority of the savings,$13,497,857, was to be realized from a reduction in labor of 20employees.

In order to realize the merger savings, Illinois-Americanalleged that it would incur $2,218,725 in expenses and desired topass these costs on to its ratepayers. Specifically, Illinois-American requested $2,085,842 in employee transition costs, $40,000in regulatory approval costs and $92,883 in communications costs. According to the proposal advanced by Illinois-American, thesecosts would be set off from the alleged consumer savings through asubsequent ratemaking scheme. In this regard, Illinois-Americanstated that it planned to initiate a general rate case based on a2001 future test year. Accordingly, the alleged merger savingswould be reflected in data used to establish, or reaffirm thereasonableness of rates paid by ratepayers following the merger.

Pursuant to the Commission's Rules of Practice (83 Ill. Admin.Code Part 200), the staff of the ICC played an integral part in theproceedings below. The staff agreed that the merger should beapproved, but determined that all of the savings and none of thecosts proposed by Illinois-American should be passed on to theratepayers. According to the staff, the costs to be incurred inorder to accomplish the merger are not costs of service or costs ofoperation of the water and sewer business. The staff maintainedthat the merger costs were to be incurred in order to effectuate achange in ownership of Illinois-American and not as a result of theutility's operational functions.

A hearing examiner for the Commission entered a proposed orderin which he also concluded that the merger should be approved. Thehearing examiner, however, rejected the Staff's position that allmerger costs should be disallowed. He proposed that the costsshould be netted against merger savings to the extent that thecosts are incurred in order to realize the savings. Nevertheless,the hearing examiner's proposed order rejected Illinois-American'sclaim for pension costs ($1,030,000), regulatory costs ($40,000), and employee separation and relocation costs ($585,520). As aresult, the hearing examiner's estimation of the costs Illinois-American should be allowed to recover was $563,205 (stock plancosts of $470,322 and communication costs of $92,883).

The Commission's final order adopted the staff's position infull and rejected the hearing examiner's conclusion that stock plancosts of $470,322 and communication costs of $92,883 should berecovered from ratepayers. Consequently, Illinois-American wasordered by the Commission to pass on all of the merger savings andnone of its merger costs to its consumers.

Illinois-American now appeals. Other facts relevant to theappeal will be introduced as they become necessary to thediscussion.

SCOPE OF REVIEW

On appeal from the Commission, this court's review is limitedto considering whether: (1) the Commission acted within itsauthority; (2) state or federal constitutional rights have beeninfringed; (3) the decision is supported by substantial evidence;and (4) adequate findings were made to support the decision.Lakehead Pipeline Co. v. Illinois Commerce Comm'n, 296 Ill. App. 3d942, 949, 696 N.E.2d 345, 350 (1998). The Commission's findingsand conclusions regarding factual questions are to be held primafacie true, and Commission rules, orders and decisions are to beconsidered prima facie reasonable. People ex rel. O'Malley v.Illinois Commerce Comm'n, 239 Ill. App. 3d 368, 376, 606 N.E.2d1283, 1289 (1993). The burden of proof on all issues raised onappeal rests with the appellant. 220 ILCS 5/10-201(d) (West 1998);United Cities Gas Co. v. Illinois Commerce Comm'n, 163 Ill. 2d 1,11, 643 N.E.2d 719, 725 (1994). 

ANALYSIS

The sole issue presented by this appeal is whether theCommission properly denied Illinois-American recovery of the coststhat it requested from its ratepayers. Illinois-American's threeprincipal arguments for reversing the Commission's decision are:(1) that the Commission departed from its past decisions byrejecting recovery of the costs; (2) that the Commission madeinsufficient findings to support informed review by this court; and(3) that the Commission infringed Illinois-American's right toequal protection under the Fourteenth Amendment of the UnitedStates Constitution and Article 1 of the Illinois Constitution.U.S. Const., amend XIV; Illinois Const. 1970, art. I,