Illinois Endorses AMI Plan, New Employee Hires

Although denying a natural gas local distribution company’s (LDC’s) application for $208.5 million in additional revenues, the Illinois Commerce Commission instead has granted the company a not inconsiderable increase of $137.1 million.

In seeking higher rates, the LDC, Northern Illinois Gas Company d/b/a Nicor Gas Company, had cited a need for ongoing infrastructure investments so as to assure compliance with new pipeline safety requirements, on both the state and federal level. According to Nicor, it is facing a pressing need to modernize its facilities and replace many segments of an aging system.

The company asserted that it also must secure more funding for the purpose of training new hires to replace an aging workforce as many of the LDC’s current employees draw nearer and nearer to retirement age.

One of the facility modernization projects most fervently supported by the company related to the deployment of advanced metering infrastructure (AMI). While Nicor acknowledged that AMI has been more closely associated with electric service than natural gas service, the LDC noted that natural gas utilities have been transitioning toward smart meter technologies as well.

Nicor stated that it has conducted two separate pilots on the efficacy of automatic metering systems in the past, one in 2000 and the other in 2012, both of which indicated that AMI would produce a net positive result for the company and its customers. Moreover, the LDC said, the “industry-wide progression and maturation of automated meter technology” enhances the potential for significant benefits to accrue from the rollout of AMI.

Not all parties were on board with Nicor’s suggested smart meter program, however. The state attorney general (AG), for one, refuted the company’s claim that more and more LDCs were installing smart meters. Indeed, on cross-examination, the AG succeeded in getting a Nicor witness to admit that he knew of just two gas-only utilities around the country that had deployed smart meters throughout their territories. The AG also stressed that even those combined electric and natural gas utilities that have used advanced meters for both their electric and natural gas customers have distinguished between the type of meter used for each service.

That is, the AG argued, most such utilities have only installed automatic meter reading (AMR) devices for their gas customers while reserving AMI for their electric ratepayers. The AG argued that AMI and AMR are different technologies and that AMI is not as adaptable for natural gas consumers, even though that is the technology that Nicor seeks to install. Because the AG accused the company of conflating the concepts of AMI and AMR, the AG also alleged that Nicor’s estimation of net benefits of as much as $28 million from AMI were “seriously flawed” and overstated.

For its part though, the commission found that the LDC had shown that the installation of smart meters could yield numerous benefits for consumers. The commission reasoned that not only would AMI assist customers in making more informed usage reduction decisions, but that the data made available by smart meters could enhance public safety and utility responses to emergency situations.

The commission conceded that AMI and AMR are not identical. However, it said, they are similar enough to make it prudent for Nicor to move forward with its proposed AMI endeavor.
The commission also observed the substantial cost savings the company will enjoy just from elimination of manual meter reading positions. The commission commented that the reduced personnel costs could translate into lower rates down the road.

It was perhaps somewhat ironic then that while touting the cost-cutting attributes of AMI in terms of the need for fewer employees, the commission simultaneously signed off on a program that would increase the LDC’s workforce overall. As described by Nicor, that program would involve the hiring of 117 full-time equivalent (FTE) employees. The company stated that due to a “changing federal and state regulatory landscape on pipeline safety,” it must assure that it has staff sufficient to meet the new requirements.

More particularly, Nicor explained that it had previously been directed by the commission to implement a Pipeline Safety Management System in accord with best safety management practices unveiled by the American Petroleum Institute. In addition, the LDC reported that it now must also abide by certain regulations on well and reservoir integrity as set forth by the Pipeline and Hazardous Materials Safety Administration.

In examining the company’s personnel request, the commission concurred with the LDC that it had an undeniable need for additional employees that have specialized training in pipeline facility inspections and repairs. The commission agreed as well that many of the company’s present employees with the most expertise in such areas are closing in on retirement. The commission thus authorized Nicor to move forward with its plan to fund 117 additional FTE employees.

Besides the company’s proposals for AMI and new FTE positions, two other matters prompted significant debate. As had been the case in the Interstate Power & Light docket before the Iowa Utilities Board, customer charges and the rate of return on common equity (ROE) were among the most hotly contested issues in the Nicor proceeding.With regard to customer charges, the company sought to raise the residential charge from $13.55 to $18.50 per month, an increase of 36.5%. Although the LDC asserted that an embedded cost-of-service study demonstrated that the higher charge was necessary and would better recover its true fixed costs of service, not surprisingly a number of parties objected.

Most of the challengers premised their opposition on arguments that such a high charge would allow the LDC to recover more than just customer-related costs through the charge. They maintained that a residential charge of $18.50 a month would actually encompass some demand-related costs, not just fixed costs. In addition, the AG, who was among the most vocal opponents, alleged that by virtue of a revenue adjustment mechanism applied as a rider, Nicor was facing little risk of diminished cost recovery, which otherwise might justify the higher customer charge.

But the commission dismissed the AG’s claims, noting that Nicor’s last base rate case had been in 2008, making it reasonable for a residential customer charge to climb to $18.50 a month, even if that marked an increase of more than one-third. Moreover, the commission deemed the company’s cost-of-service study to be consistent with the cost analysis methodology set forth in that 2008 proceeding.

On the matter of cost of capital, Nicor and the AG were once again on opposing sides, with the LDC initially requesting a 10.7% ROE while the AG propounded that an ROE no higher than 9.2% was justified. According to the AG, the company had clearly overstated its ROE requirements, especially since its proposal included 10 basis points for flotation costs.

Although Nicor and commission staff eventually settled on a 9.80% ROE, the AG continued to argue for a lower return. The commission, however, was persuaded that a 9.80% ROE was appropriate under the circumstances and represented an approximate midpoint of the high and low ROE values suggested by the parties.

The commission affirmed that a 10.7% ROE obviously would be much too high. In fact, the commission said, it would have been the highest ROE approved for the LDC in almost 25 years. On the other hand, the commission noted, the 9.80% ROE came close to the 9.64% ROE that is the average for all utilities in the U.S. over the last 24 months.

In accepting the stipulated ROE value of 9.80%, the commission pointed out that there was no doubt that it struck a fair balance between competing proposals. Plus, the commission stated, it was fully supported by the record.

To that end, the commission stressed that the evidentiary standard for ROE is that the adopted value must be based on more than a “mere scintilla” but need not rise to the level of a preponderance of the evidence. Re Northern Illinois Gas Co. d/b/a Nicor Gas Co., 17-0124, Jan. 31, 2018 (Ill.C.C.).