What a mess! ComEd puts brakes on smart grid rollout after rate dispute
Quick take: What a disappointment for ComEd and its many supporters. With help from many, it managed to overturn a governor's veto to get very specific legislation authorizing adequate returns for a multi-billion-dollar grid modernization effort. And then, after the project was already underway, the state's Commerce Commission stepped in to nullify some of the legislation's provisions. - Jesse Berst
Commonweatth Edison said it will go to court to fight an Illinois Commerce Commission (ICC) ruling this week that would reduce the utility's cost recovery under a new formula that was part of the Energy Infrastructure Modernization Act (EIMA) that became law last year.
The legislation authorized a 10-year, $2.6 billion ComEd investment program the utility said would drive value to customers through a stronger electric system with fewer outages, faster restoration and new digital smart technologies that provide customers with more information, a greater ability to control their electric bill and new ways to save money.
As David O'Brien wrote in an op-ed piece for SGN earlier this week on the smart grid regulatory cloud hanging over Chicago, there have been a lot of politics swirling around this matter since well before the EIMA was enacted:
"The legislation was not without the kind of drama all too common in the political realm. The EIMA bill never enjoyed the support of the Governor, the Attorney General, the Chair of the Illinois Commerce Commission or the AARP. Throughout the process, all of them made their opposition known. In fact, the bill became law only after surviving a gubernatorial veto last fall.
O'Brien, a former Vermont regulator now with BRIDGE Energy Group, noted that opponents came up with novel interpretations of what the legislation intended. A ComEd statement suggested the Illinois Commerce Commission ruling was "inconsistent" with the legislation on two of three issues up for rehearing this week. (You can read the full ComEd press release on page 2, followed by a statement from the ICC.)
ComEd Announces Delays to Grid Modernization Program
Following ICC Rehearing Decision
Ruling defers smart meter installations to 2015, postpones creation of 2,000 jobs and
$2.3 billion in customer savings
CHICAGO (Oct. 3, 2012) - ComEd today announced delays to key elements of its grid modernization program under the Energy Infrastructure Modernization Act (EIMA), following the Illinois Commerce Commission decision that granted ComEd recovery of the cost of funding its pension, but denied cost recovery on two other key issues, which ComEd will appeal in court.
"With this ruling, we have no choice but to delay some elements of the grid modernization rollout, at least until we have an outcome in the courts,” said Anne Pramaggiore, ComEd president and CEO. "The adverse rulings on the interest rate and rate base issues significantly impair ComEd’s ability to finance long-term investment programs.”
Last year, the General Assembly enacted EIMA, directing electric utilities to invest in the state’s electric infrastructure, improve reliability, create jobs, and attract investment to Illinois. The law also granted utilities the right to recover the actual costs of investment. Today’s ICC ruling is inconsistent with the legislation on two of three issues considered on rehearing.
After the ICC denied ComEd cost recovery on 13 issues in May, the company sought rehearing on all 13 issues but the ICC agreed to reconsider three, and today reversed its earlier decision on only one. The impact of these issues will be nearly $100 million per year in 2014 and beyond, costs that cannot be recovered and subsequently reinvested into the system.
"Although today’s ruling will allow us to maintain a minimal level of investment of a few core programs, it is insufficient to fully fund our grid modernization efforts,” said Pramaggiore. "While we remain committed to fulfilling the promise of EIMA and intend to meet our obligations under the law, we have to be judicious about making investments if we do not have full cost-recovery, as authorized by the legislation.”
Because the ICC is not fully funding the grid modernization program, ComEd is forced to make modifications to its program to align the deployment of key infrastructure with the ICC decision. ComEd must delay installation of additional smart meters until 2015 as a result of today’s ICC ruling. This new deployment schedule will be reflected in a ComEd filing at the ICC later today. In addition, some of the basic infrastructure programs as well as the Chicago training center will either be delayed or phased in more gradually.
The result is that more than $2.3 billion in customer savings and creation of 2,000 full-time equivalent jobs will be delayed. 2/ Rehearing Decision
The legislation authorized a 10-year, $2.6 billion ComEd investment program to drive value to customers through a stronger electric system with fewer outages, faster restoration and new digital "smart” technologies that provide customers with more information, a greater ability to control their electric bill and new ways to save money.
"Labor leaders enthusiastically supported EIMA, also known as the smart grid bill, and it has already resulted in many well-paying, skilled jobs for Illinois union workers while providing a boost to other local industries,” said Dean Apple, president, IBEW Local 15. "This decision will have a negative impact on the union workers and others hired to do this important work, their families and our state as a whole. We hope this decision will be reversed in the courts.”
ComEd had already begun the work of modernizing the grid. This year alone, ComEd had already invested hundreds of millions of dollars in smart grid technology and projects to improve reliability for customers. Significant efforts have been focused on storm hardening to further reduce the susceptibility of storm-related damage to power lines.
The ICC’s ruling today on the pension cost recovery will increase the average residential customer bill by about 0.7 percent starting at the end of October. However, even with this change, the new rates are still 1.4 percent lower than 2011.
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Commonwealth Edison Company (ComEd) is a unit of Chicago-based Exelon Corporation (NYSE: EXC), the nation’s leading competitive energy provider, with approximately 6.6 million customers. ComEd provides service to approximately 3.8 million customers across northern Illinois, or 70 percent of the state’s population.
Cautionary Statements Regarding Forward-Looking Information
This press release contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, that are subject to risks and uncertainties. The factors that could cause actual results to differ materially from the forward-looking statements made by Exelon Corporation and Commonwealth Edison Company (Registrants) include those factors discussed herein, as well as the items discussed in (1) Exelon’s 2011 Annual Report on Form 10-K in (a) ITEM 1A. Risk Factors, (b) ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations and (c) ITEM 8. Financial Statements and Supplementary Data: Note 18; (2) Constellation Energy Group’s 2011 Annual Report on Form 10-K in (a) ITEM 1A. Risk Factors, (b) ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations and (c) ITEM 8. Financial Statements and Supplementary Data: Note 12; (3) the Registrant’s Second Quarter 2012 Quarterly Report on Form 10-Q in (a) Part II, Other Information, ITEM 1A. Risk Factors; (b) Part 1, Financial Information, ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations and (c) Part I, Financial Information, ITEM 1. Financial Statements: Note 16; and (4) other factors discussed in filings with the SEC by the Registrants. Readers are cautioned not to place undue reliance on these forward-looking statements, which apply only as of the date of this press release. None of the Registrants undertakes any obligation to publicly release any revision to its forward-looking statements to reflect events or circumstances after the date of this press release.
ICC Issues Decision in ComEd
Formula Rate Rehearing
The Illinois Commerce Commission today issued an order on rehearing reducing ComEd revenue by approximately $133 million and approving new electricity rates through the end of 2012 to reflect the reduction, in accordance with a new performance-based formula rate plan.
The Commission’s order sets the formula rate under a new law that ensures ComEd receives the prescribed profit margin on all investments to improve reliability and build a smart grid. The law allows ComEd to recover this return on investments annually to reduce the lag in cost recovery that existed under previous rate setting processes.
The Energy Infrastructure and Modernization Act (EIMA) allows participating utilities that agree to make specified investments in electric reliability projects and a smart grid to recover their costs annually under a prescribed formula rate to provide a more certain and timely cost recovery mechanism for all of their investments and expenses. ComEd filed its initial petition in (Docket 11-0721) in November, 2011 seeking approval for a proposed formula rate. The proposal included a reduction in revenue of approximately $43.7 million.
The Commission issued an order May 29 reducing the company’s revenue by approximately $168 million. The company filed a petition seeking rehearing and on June 22 the Commission agreed to rehear three financial issues: the definition of the term "pension asset”, the interest rate to be applied to any under or over collections that occur from the annual reconciliation and whether to use ComEd’s year-end balance or an "average year” rate base when reconciling expenses and revenues.
The Commission determined upon rehearing that the law allows ComEd to earn a return on its pension asset as reported to the Federal Energy Regulatory Commission per the legislative directive of EIMA. The allowance is estimated to provide the company with approximately $35 million in additional revenue.
The Commission adopted the use of year-end rate base to determine ComEd’s formula rate for the next year and an average rate base for determining the reconciliation amount. This will permit the company to recover its capital and operating costs quickly, while ensuring that ratepayers do not over-pay for those assets and is consistent with the position adopted by the Commission in Ameren’s recent formula rate case (Docket 12-0001).
The Commission also determined that the interest rate to be applied to the annual reconciliation of any under or over recovery on investments should be based on ComEd’s short term cost of debt. ComEd’s investments continue to earn a return based on the weighted average cost of capital. Today’s decision on interest rates applies only to the reconciliation balance. This is also consistent with the recent Ameren decision.
ComEd continues to recover all of its prudently-incurred AMI (Smart Grid) expenses under state law. Recovery of those and other expenses were not at issue today.
The vote was 4-1.
ComEd has another rate case pending, its annual update to rates (Docket 12-0321), which will result in another adjustment to rates in early 2013.