The Illinois Commerce Commission has authorized Northern Illinois Gas Company to increase base rates by $167.7 million. In setting the company’s revenue requirement the commission adjusted Nicor’s proposed operational and capital costs, including the depreciation expenses, customer deposits amounts, and pension and other post-employment benefit expenses. The commission also approved a rate of return on equity (ROE) of 9.73%, which is lower than Nicor’s current authorized ROE of 9.8% and lower than Nicor’s ROE request of 9.86%. It rejected the Administrative Law Judge’s recommended ROE of 9.13%, finding it not reasonably sufficient to assure the confidence in the financial soundness of the company.

The Commission found that a stipulated ROE of 9.86% presented by the parties to the case appears to be derived from a simple average the ROEs proposed by Nicor Gas and the commission Staff. It found further that Nicor Gas’s proposed ROE of 10.6% is inflated as it includes adjustments for financial risk, including a so-called market-to-book adjustment as well as a flotation cost adjustment. The commission observed that Nicor Gas does not have market-traded common stock and thus does not have observable market-to-book ratios. Explaining its preferred method of analyzing ROE data, the commission said that to begin, it has determined that the entire range of the forecasted ROE values presented by all of the parties to the case comprised of Discounted Cash flow (DCF), Capital Asset Pricing Model (CAPM), Risk Premium, and Expected Earnings calculations produced, without averaging them first, is the most complete range of ROEs in the record evidence. It acknowledged that while it has historically has focused on the DCF and CAPM models, there may be a value in exploring additional models presented by the parties, specifically the Risk Premium and Expected Earnings, to bring its overall ROE methodology into closer alignment with how investors inform their investment decisions.

The commission concluded that the resultant range of reasonable ROEs based on the record evidence is: 9.5%, 9.5% and 10.2% as determined using the CAPM, DCF and Risk Premium. In averaging this range of numbers, the commission arrived at a ROE of 9.73% and explained that averaging at this point in a ROE analysis is a reasonable approach that has been traditionally both used by the commission and upheld by the courts.  It also pointed out that 9.73% is consistent with the average award in recent years of 9.75% and is also within the 12-year historical range of 9.05% to 10.15%. The commission commented further that the 9.73 figure is also consistent with the general downward trend in ROE awards reflecting a generally downward trend in authorized ROE over the past several years--consistent with the declining interest rate environment. At the same time, the commission pointed out that while authorized returns on equity have fallen to the mid-9% range, utilities continue to have access to large amounts of external capital even as they are funding large capital programs. Re Northern Illinois Gas Co. d/b/a Nicor Gas Co., 18-1775, Oct. 2, 2019 (Ill.C.C.).