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Illinois Regulators Sign Off on Power Auction for Ameren, ComEd

After a drawn out and at times contentious process that pitted Illinois power companies against the state's attorney general, governor and a leading utility watchdog group, the Illinois Commerce Commission (ICC) last Tuesday voted unanimously to authorize Commonwealth Edison (ComEd) and several Ameren companies -- Central Illinois Public Service, Central Illinois Light Co. and Illinois Power -- to conduct a joint auction to purchase electricity to serve nearly 4.9 million customers.

In response, Illinois Attorney General Lisa Madigan said she was committed to fighting the move in the appellate courts. Madigan said the ICC's action "will mean huge, unfair and unnecessary rate increases for ComEd and Ameren customers who will end up paying an extra $1 billion per year for the same electric service that they have today." She said the order "ignores mandatory consumer protection provisions under Illinois law and adopts a method of pricing electricity that is clearly contrary to the [Illinois] Public Utilities Act."

The auction will be held in early September 2006 and new tariffs reflecting the market price of electric power will take effect Jan. 2, 2007.

The ICC said it was approving a reverse auction as the preferred means for procuring energy for electric utility customers when a rate freeze expires at the end of this year. The commission found that this method would provide ratepayers with the lowest-cost electricity available at this time. The ICC also said that it was adding "significant consumer protections to the measure while also maintaining the state's regulatory interest in the future marketplace."

The ICC also moved to ensure continued regulatory oversight by approving an annual prudency review. Conditions include annual public hearings to determine the prudence and accuracy of purchased power costs resulting from the auctions. A separate annual review will look at the procurement process to see if any improvements or changes are necessary. Based on ICC staff testimony, the commission eliminated ComEd's proposal to purchase 25% of its electricity under five-year contracts out of a concern that it would unnecessarily raise costs to consumers. By doing so, the ICC aligned products in the ComEd docket with those in the Ameren docket.

ComEd had opposed a post-auction prudency review process. The utility testified that such a measure could have a detrimental effect on suppliers' confidence in the auction results. "We disagree with the commission on this but will work within the parameters the ICC has laid out and do whatever is necessary to mitigate any negative effects such a process could have on the auction itself," said Frank Clark, ComEd's CEO.

The ICC said that consumer conditions are designed to enhance the overall transparency of the auction process and focus on three key areas:

Small business rates were frozen and residential rates have been cut by 20% and then frozen since the state began an eight-year transition to a deregulated market. In fact, most residential customers in Illinois benefited from a series of legislatively mandated rate decreases in the early years of the transition period, the ICC noted.

During that same time, many of the larger utility customers began shopping for power in the market, and paying ComEd or Ameren's companies to deliver that power. Beginning in 2007, electricity prices for customers that do not select an alternative retail electric supplier will reflect the prices from the auction.

For residential and smaller commercial customers, the prices will be a blend of three-year, overlapping contracts. Blending of longer term supply contracts is designed to provide a measure of price stability. For larger commercial and industrial customers, prices will reflect either one-year supply contracts or, in some cases, hourly prices.

Standard & Poor's Ratings Services (S&P) said the ICC's decision to adopt an auction process does not affect the ratings on ComEd (BBB+/Watch Neg/A-2), its parent Exelon Corp. (BBB+/Watch Neg/A-2) and its other subsidiaries. Similarly, Fitch Ratings said ComEd's current ratings (BBB+ senior unsecured) and negative rating outlook were unaffected by the ICC ruling.

"Although this action is considered a necessary step to achieve a competitive wholesale market and provides clarity to the commission's intentions, our concerns remain regarding the ultimate outcome" due to the level of opposition facing the auction, S&P said.

Fitch is maintaining the negative rating outlook on ComEd's securities "reflecting the expectation of a negotiated settlement with intervenors that limits the initial rate increase associated with higher energy procurement costs. Based on public statements by ComEd management, the most likely scenario is a settlement that provides for the deferral of some portion of procurement costs for future recovery."

The ICC's decision follows an at times heated debate over the power auction proposals. As recently as this month, the Illinois Citizens Utility Board (CUB) called the reverse auction power procurement proposals of ComEd and Ameren illegal and predicted Illinois ratepayers would face 20-40% rate increases. ComEd said CUB was engaging in scare tactics and noted that the consumer advocacy group had failed to come up with a viable plan of its own.

CUB has vowed to appeal approval of the auction plans. "Make no mistake about it, the ICC today voted for a huge rate increase to consumers," CUB Executive Director David Kolata said. "This ruling means that billions of dollars will be taken out of the pockets of Illinois consumers and out of our state's struggling economy to enrich Exelon, which is already the most profitable utility in the country."

In 2005, Illinois Gov. Rod Blagojevich sent the ICC a letter asking the commission to dismiss ComEd's request for approval of the auction process, stating that "the [Illinois] Public Utilities Act only authorizes the commission to approve market-based rates for customers who take electric service that has been declared competitive."

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