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ADM v. Illinois Commerce Commission, Nos. 84898, 84899 (Ill. S.Ct.)

Docket Nos. 84898, 84899 cons.--Agenda 31--September 1998.

ARCHER-DANIELS-MIDLAND COMPANY et al., Appellees, v. THE ILLINOIS COMMERCE COMMISSION et al., Appellants.

Opinion filed December 3, 1998.

JUSTICE HEIPLE delivered the opinion of the court:

Central 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's order allowing the use of CIPS's fuel adjustment clause (FAC)⁽¹⁾ to recover costs associated with a fuel contract modification. We now reverse the judgement of the appellate court and hold that the fuel contract modification costs and associated carrying costs, or interest costs, are recoverable through an FAC.

BACKGROUND

In 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's Delta Mine a minimum of 1.3 million tons of high-sulfur coal annually through December 31, 2002, for use in CIPS's 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.

The primary source for the coal was AMAX's 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.

By 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.

Second, the scrubber at CIPS's 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.

Given 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.

The 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.

In 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's customers through the FAC. Consequently, CIPS sought the Commission's 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's proposal to pass the contract modification costs through the FAC.

In the proceedings before the Commission, CIPS produced evidence that in the period between 1996 and 2015, the contract modifications would produce a "Present Value of Revenue Requirements" 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.

CIPS 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 "prepayment/ton" 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's customers would pay the same amount for fuel as they did under the original Delta Mine Contract.

The 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.

The appellate court, however, reversed the order of the Commission. The appellate court found that the restructuring cost was not a "direct cost of fuel," 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.

ANALYSIS

In reviewing an order of the Commission, "[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 ***." 220 ILCS 5/10-201(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'n, 163 Ill. 2d 1, 12 (1994). However, the Commission's interpretation of a question of law is not binding on a court of review. United Cities Gas, 163 Ill. 2d at 12.

Section 9-220 of the Illinois Public Utilities Act (Act) states:

"Notwithstanding the provisions of Section 9-201, 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 ***." (Emphasis added.) 220 ILCS 5/9-220 (West 1996).

Given 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 "costs of fuel."

The Illinois Administrative Code (Code) states that "costs of fuel" include "direct cost[s] of fuel." 83 Ill. Adm. Code