ComEd’s new electric rates: Case for a rate increase

In 1997, Illinois passed legislation restructuring the electric utility industry. Major supporting factors included the adverse effects of high electric rates on large customers and an overall sense of frustration with the existing regulatory process.

The legislation called for Commonwealth Edison to sell their power plants. Coal plants were purchased by Midwest Gen, and nuclear plants were purchased by an affiliate, Exelon. Since building a competitive delivery system was too costly, ComEd retained ownership of power lines. As owners, they remain subject to regulation by the Illinois Commerce Commission.

The transition, which ends Jan. 1, 2007, was guided by detailed directions for actions to take. It also allowed time to develop post-transition plans.

Residential electric rates were reduced 20 percent and frozen through the end of 2006. During the rate freeze, ComEd customers saved $4 billion and paid rates 32 percent below the average of the 10 largest cities in the country. While the cost of food, rent, medical services and education rose, electrical rates remained artificially low.

Large customers took advantage of their ability to buy power in the open market. More than half of those using more than 1 megawatt purchased power from retail sources. However, the artificially low rates prevented companies from producing and selling electricity to residential users.

Another key feature was developing a regional wholesale market reaching from the Atlantic to the Mississippi known as PJM. ComEd can freely buy and ship electricity among utilities in 13 states without paying fees as they formerly did when making similar transactions. Operating as one large system ensures continuous and rapid communication among all power plants in the regional grid, and increases reliability.

Since real time market prices are now posted on the Internet, they are visible and known throughout the regional market. Spot market prices are also posted, making it easier to determine the price and availability of electricity at peak demand times. Price visibility makes it possible to create a market system to buy and sell electricity.

During the transition, performance was improved. Nuclear plants produced power 49 percent of the time before restructuring, and 93 percent in 2004. Grid reliability also improved as power outages decreased 44 percent, and the duration of outages decreased 52 percent.

When the transition ends in 2007, ComEd will begin market purchases of electricity for its customers. An annual reverse auction will open at the highest reasonable price ComEd believes will draw a large number of suppliers. ComEd will continue to lower the price to drive out the highest-priced producers. This will continue until the needed power is purchased at the least cost.

The auction will include oversight by qualified representatives of the Illinois Commerce Commission, including two technical experts who will file written reports to verify the fairness of the process and the prices paid for electricity.

Contracts will be offered in small bundles to reduce the risk that all the needed power would come from one producer. They will be staggered so not all expire in the same year. By offering contracts over periods of one through five years, a price spike in one year will only affect a portion of the supply. For example, the wholesale price of electricity in New Jersey rose 19 percent in one year, but since only some contracts were affected, rates to customers only rose 2.4 percent that year.

Since rates were frozen and fuel prices have increased, ComEd expects future electrical purchases will be more costly. During the transition, ComEd invested $3 billion in expanding and upgrading the grid and plans to recapture this expense for their stockholders. The combination of expenses is expected to produce a 15 to 20 percent rate increase for customers.

To lessen the adverse effects of such a rate hike, ComEd proposes that customers will be charged only part of the pending rate increase through 2009, paying no more than 1995 rates. The rest of the rate increase will be gradually applied to customer bills after 2009.

ComEd’s adjustments will mitigate the adverse effects of rate increases for customers during the transition to a market economy.

From the Dec. 7-13, 2005, issue

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