Report:

Formula rates are dead, long live guaranteed profits

Released by: Illinois PIRG

In the wake of the Commonwealth Edison corruption scandal, seemingly everyone has professed a commitment to end formula rates, a key policy won during the bribery scheme. As details of a compromise energy bill emerged in the final days of the legislative session, legislators and other parties to the negotiations have said that the energy bill ends formula rates. For example, the Crain’s Chicago Business June 1 story, Here's what's in the big state energy bill still awaiting action, states the “controversial formula-rate authority that ComEd and Ameren Illinois enjoy, thanks to a law passed in 2011, would end.”

According to drafts of the legislation circulated in late May and early June, this is inaccurate on two levels. 

First, rather than end the current formula rate policy ahead of its current December 31, 2022 sunset, the legislation not only leaves that timeline in place, it extends a portion of the current formula rate, annual actual cost reconciliations, past 2022. Second, the legislation incorporates key formula rate policies into a new ratemaking structure, extending utilities’ guaranteed profits. 

These annual actual cost reconciliations, a process explained in more detail below, must end if the General Assembly wishes to completely end formula ratemaking. Instead, the omnibus legislation codifies the contention, initially made by ComEd in support of their 2011 law, that Illinois’ large electric utilities cannot invest in their infrastructure unless they have “certainty,” that is, a guarantee to profit on every dollar they spend.

On top of continuing the “certainty” that guarantees ComEd and Ameren profits, the omnibus legislation significantly increases the amount of those company profits, by effectively raising their profit margin, known as the Return on Equity, or ROE. 

One unintentional silver lining of formula ratemaking has been relatively low ROEs, as the rate-setting formula tied the ROE to interest rates, which have been historically low. This is one critical piece of formula ratemaking not carried over into the new ratemaking structure. Instead, the ROE will once again be set by the Commission, which would reward ComEd and Ameren higher ROE’s than they currently have under formula rates. 

The combination of extending formula rate profit guarantees with higher utility profit margins represents a windfall for ComEd and Ameren. Its value for ComEd is almost certainly more than the subsidy the legislation provides Exelon.

To demonstrate the potential value of this windfall to ComEd, we have calculated ComEd’s profits over the next four years as if the company had the higher ROE from the bill over that time. To be clear, this is not a prediction, as new rates from the new ratemaking scheme will not kick in until 2024. Rather, our calculations provide an indication of the significant windfall this legislation provides ComEd.

Findings

To provide an indicative view of what ComEd’s profits could be after the impacts of the omnibus legislation, we created an “Omnibus Scenario.” Our calculations are based off of ComEd’s projected rate base, the value of its assets it earns a profit off of, as reported to Exelon investors in February 2021. We used the most recent Commission-granted ROE, to Ameren Gas in ICC Docket No. 20-0308 (the second most recent ROE, to Nicor Gas, is higher). We inserted this ROE into the capital structure used to calculate ComEd’s 2021 rates to determine an overall Weighted Average Cost of Capital (WACC) also known as the overall Rate of Return (ROR), which is applied to a utility’s rate base to determine its overall profits.

Under this Omnibus Scenario, we found:

  • ComEd would begin collecting over $1 billion in authorized profit from customers in 2023. 

  • Over four years, 2021 through 2024, ComEd would be authorized to earn $3.9 billion in profit, not accounting for additional profits from regulatory assets. For reference, in the 12 years ComEd existed as an Exelon subsidiary before formula rates began, it reported $3.9 billion in profit to the Securities and Exchange Commission. 

  • We also compared ComEd’s profits under the Omnibus Scenario to two baselines.

    • In Baseline One, we applied the overall Rate of Return, as proposed in ComEd’s current formula rate update docket, to the same ComEd rate base projections shared with Exelon investors. Compared to Baseline One, under the Omnibus Scenario, ComEd would make an additional $664 million in profits over four years. 

    • In Baseline Two, the rates ComEd customers are paying in 2021 would be frozen in place over the four year period--as if formula rates, including the annual formula rate update before the Commission now, ICC Docket No. 21-0367, were stopped. Compared to Baseline Two, under the Omnibus Scenario, ComEd would make an additional $893 million in profits over four years. 

This means that were ComEd to enjoy a higher ROE over the next four years, it would earn somewhere between $166 million to $223 million in additional profits per year. Exelon’s subsidy from the legislation, reported to be $694 million over five years, amounts to “only” $139 million per year. 

Again, under the omnibus legislation, ComEd would not actually collect rates based on a higher ROE until 2024, so this scenario is not predictive, but rather indicative of the future profits ComEd could earn based on the best information currently available.

Reasonable people may disagree as to the merits of other elements of the legislation’s proposed “Performance-Based Ratemaking,” but the authors know of no good faith public interest rationale for guaranteeing utility profits as formula rates do and this legislation would continue. 

If the Illinois General Assembly intends to completely end formula ratemaking, it must amend the omnibus legislation to, at a minimum, eliminate annual actual cost reconciliations and the “Tariff regarding transition in rates.”

Support Us

Your donation supports Illinois PIRG’s work to stand up for consumers on the issues that matter, especially when powerful interests are blocking progress.

Consumer Alerts

Join our network and stay up to date on our campaigns, get important consumer updates and take action on critical issues.
Optional Member Code



Illinois PIRG is part of The Public Interest Network, which operates and supports organizations committed to a shared vision of a better world and a strategic approach to social change.