Illinois’ House Electric Utility Oversight Committee voted 9-4 last Monday to extend a current electric utility rate freeze in the state by another three years starting in January, a move that Ameren and Exelon both have said would lead to bankruptcy for their state utilities. Credit rating agencies confirmed the utilities’ dire predictions the following day.
Ameren Illinois Utilities President Scott A. Cisel warned the committee Monday that extending the rate freeze also could lead to blackouts, gas supply disruptions, up to 1,400 job losses and a halt on energy reliability projects.
The legislation, HB 5766, will now move to the House floor. The General Assembly currently is not in session, but is scheduled to return for a short veto session in the second half of November. A vote on the House floor could take place sooner if a special session is called.
Gov. Rod Blagojevich and Illinois House Speaker Michael Madigan, both Democrats, have vowed to work together to secure enough votes to get the measure passed in a special session. In a recent letter to the governor, Madigan said competition among electric providers has not developed as lawmakers intended a decade ago when rates were frozen, and the outcome of a recent power auction was not what they envisioned.
The auction conducted last month among power companies determined that customers will pay 22-55% more for electricity starting in January — 22% more for Commonwealth Edison (ComEd) customers, 45% more for AmerenIP customers and 55% more for AmerenCILCO customers. HB 5766 would prevent those rate increases from taking place. To ease the impact of higher rates on their retail customers, all of the Ameren utilities have proposed plans to defer a portion of the rate increases over a period of years.
Merrill Lynch analyst Jonathan Arnold said Tuesday he believes the bill will pass in the House but may be challenged in the Senate. “Our working assumption is that a freeze would not pass the upper house,” Arnold said.
“Gov. Blagojevich has said that he would call a session in the event that the necessary votes were in hand. To date no session has been called, suggesting that the votes may not be there, particularly in the Senate, whose leader Emil Jones has been reluctant to get involved,” Arnold added in a research note. “We understand that the governor has not been actively courting support from senators, but is leaving that effort to the consumer groups, such as Citizens Utility Board (CUB).”
Speaking at a news conference in the state capitol Monday, CUB urged lawmakers to stand up to Exelon utility ComEd and Ameren by passing the bill. “First it was ComEd CARES, now it’s ComEd scares,” CUB Executive Director David Kolata said, referring to ComEd’s Customers’ Affordable Reliable Energy program. “These threats are nothing more than bankruptcy blackmail designed to scare the public and elected officials into siding with two very profitable, giant corporations who want to make billions of dollars in extra profits at consumers’ expense.”
Kolata claims that with higher rates next year Exelon would “reap close to $2 billion a year in windfall profits” and Ameren will earn “an extra $700 million a year.”
Meanwhile, Ameren said Monday without higher rates its Illinois utilities could be insolvent by February 2007 or sooner. And without a state bail-out, there could be blackouts or rotating brownouts and the disruption of gas supply. In the aftermath, Cisel predicted that Ameren would be forced to cut 25% of its workforce, or about 700 jobs. Nearly all the company’s contractors (700 more employees) would be laid off, he said. Reliability projects would be stopped. New customer connections would be put on hold and all community donations and projects would be halted.
“It’s important for people to understand that if legislators extend the rate freeze, cash and available credit will dry up,” Cisel told the committee. He predicted that the credit ratings of Ameren Illinois’ utilities would be “slashed to deep junk status; we will then run out of cash and available credit and be unable to borrow.
“Consequently, Ameren Illinois utilities will no longer be able to buy power and natural gas. In order to avoid power and gas supply disruptions, we believe it is likely the state would have to step in and pay for these critical commodities, or our Illinois customers will face service disruptions in a matter of months just like those that occurred in California.”
Arnold said that extending the rate freeze would not undo the results of the recent power auction but would force the utilities to pay the higher auction prices, leaving them unable to recover the costs.
“This has clear precedent in the California crisis, where customers ultimately ended footing an even higher bill,” said Arnold. “While the utilities would likely seek legal redress under the ‘filed rate doctrine,’ such a litigated outcome would likely involve the utilities filing for bankruptcy…and protracted uncertainty.
“Ultimately we doubt that Illinois will end up choosing the rate freeze option, although the short-term political attraction of voting for such legislation in an election year clearly cannot be ignored.”
Moody’s Investors Service put the credit ratings of Ameren Corp., Ameren’s utility subsidiaries and Commonwealth Edison on review for possible downgrade, affecting about $11 billion of debt securities.
“Enactment of rate freeze legislation would be expected to result in a multi-notch downgrade of the ratings of Ameren’s Illinois utility subsidiaries to speculative grade, reflecting the severe impact such action would have on the utilities’ cash flow and liquidity,” Moody’s said. It also predicted a “multi-notch downgrade” of ComEd’s ratings. ComEd has estimated that if the legislation were passed in its current form, it would incur losses of about $1.4 billion during 2007.
“These extraordinary initiatives come after an Illinois Commerce Commission (ICC) sanctioned power supply auction held in September resulted in significantly higher power procurement prices for the utilities, which have not increased their rates since 1982 in the case of Central Illinois Light Co. and 1992 in the case of Central Illinois Public Service and Illinois Power,” Moody’s noted. ComEd has not increased rates since 1995 and reduced residential rates by 15% in 1998 and by an additional 5% in 2001.
“Utilities are normally entitled to collect prudently incurred costs, including those for purchased power, and the utilities have already signed contracts that will require them to pay higher prices for purchased power beginning on Jan. 1, 2007,” Moody’s said.
The credit rating agency said its review of parent company Ameren’s ratings reflects the importance of the three Illinois utility businesses (AmerenCIPS, AmerenCILCO and AmerenIP) to its consolidated financial profile. The Illinois utilities now make up nearly half of Ameren’s total utility business and any financial deterioration of the Illinois subsidiaries would severely limit upstreamed dividends to the parent company, Moody’s said.
The ratings and outlook are unchanged for ComEd’s parent, Exelon Corp. and affiliates Exelon Generation Co. and PECO Energy because of fairly strong performance trends for the two operating subsidiaries, which represent a substantial majority of Exelon Corp.’s consolidated earnings and cash flow, and the belief that any financial stress due to legislative action would be largely isolated to ComEd, according to Moody’s.
Standard & Poor’s Ratings Services said Tuesday that the House panel’s vote “detracts from the creditworthiness” of Ameren Corp., its subsidiaries and Exelon Corp. and its subsidiaries. “This represents another small step toward the enactment of legislation that would lead to immediate and severe credit deterioration for the companies’ Illinois utilities,” S&P said. “The ratings on the companies are not affected at this time.
“In our view, a rate freeze extension would lead to insolvency of Ameren’s Illinois subsidiaries, Central Illinois Public Service Co., CILCORP Inc., Central Illinois Light Co., and Illinois Power Co. and Exelon’s subsidiary Commonwealth Edison Co.” S&P said if the rate freeze legislation is passed, it will lower its ratings on the Illinois utilities into the “B” category.
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