Energy Customer Alert

Settlement Agreement Leads To Changes In The Illinois Electric Market

Major changes are in store for large commercial and industrial consumers in the Illinois retail electric market. On March 28, 2003, the Illinois Commerce Commission (ICC), the regulatory body that oversees all Illinois public utilities, issued three Orders that closely track a settlement agreement that resolves longstanding disputes between Commonwealth Edison Company (ComEd), a coalition of competitive retail electric suppliers, and consumer and governmental representatives.

As a result of the Orders approved by the ICC, many Illinois businesses will be able to stabilize their electric bills and receive additional discounts as competition and customer choice have been given a new life in Illinois. The Orders resolve a number of issues for customers who choose to enter the competitive market, including: what delivery rate ComEd will charge to transport electricity over its wires, what "transition charge" ComEd will charge, and what rates will be charged if a customer returns to ComEd after taking service from a competitive supplier. The settlement agreement also provides $21 million to the city of Chicago for energy and environmental programs, $3 million to Cook County for similar programs, and $11 million to the Building Owners and Managers Association of Chicago (BOMA) for expenses its members incurred to comply with the city ’s Electrical Code. However, in order to take full advantage of these opportunities, companies must consider all of their options no later than June 2003.

Illinois business customers have had a choice of electric suppliers since October 1, 1999, under the terms of the Electric Customer Choice and Rate Relief Law of 1997 (the "Customer Choice Law "). The Customer Choice Law provides that the regulated electric utility still owns and operates the wires, but competitive suppliers are able to transport electricity over the utility’s wires. As a result, customers have been able to buy electric generation, billing, and metering services from suppliers other than their local utility. The ICC has certified over 10 suppliers to serve customers in ComEd’s service territory. Many customers who have chosen to leave the standard rate program of ComEd have elected to take service under ComEd ’s "Power Purchase Option " - an alternative that allows businesses to pay "deregulated" power rates without switching to a competitive supplier. While some customers have been able to realize savings in the competitive market, many customers have complained about the complexities of the market and the volatility of components that comprise their electric bills.

The recent ICC Orders, while leading to a higher degree of certainty for the marketplace, will result in Illinois business owners having to make a number of important decisions in order to take advantage of the stability of the market and these new opportunities to save. Contracts with competitive suppliers often times are complex, requiring legal review and negotiation to ensure that customers receive the best deal.Customers must act quickly if they are going to take advantage of this opportunity. The new rates will be effective for summer 2003. Piper Rudnick, with its extensive experience in navigating the intricacies of the Illinois retail electric market, including being involved in the development and implementation of the Customer Choice Law, is highly qualified to help business consumers benefit from the latest restructuring of the electric market in Illinois.

There are three primary components to the ICC Orders. First, the Orders resolve issues related to the "Market Value Index," the valuation tool which sets Customer Transition Charges (CTCs) and ultimately determines how rival suppliers compete with each other against ComEd in Illinois. Second, the Orders approve "Delivery Service Tariffs," which likely will be the rates that ComEd charges through December 31, 2006. Third, the Orders address ComEd ’s role as the "Provider of Last Resort " for large industrial customers, as ComEd strives to shed itself of that responsibility. Additionally, among others things, the settlement agreement establishes funds for the city, Cook County and BOMA.

Under the terms of the recent Orders, the methodology for ComEd’s "market value index" will be revised to provide what should be a more accurate reflection of the price of electricity in the Illinois market. The market value index is a key component in calculating customers’ CTCs and their PPO rate.

Under the Customer Choice Law, as part of the transition to a competitive market, whenever customers take service from a competitive supplier they are required to pay CTCs to ComEd until 2007. The more accurate pricing model is expected to increase the market value, reducing customers’ CTCs and making it easier for suppliers to compete for commercial and industrial customers. Additionally, for the first time since the Illinois market opened, customers will be given the opportunity to lock-in their CTCs for multiple years and may achieve greater savings as a result.

The change in the methodology to calculate the "market value" of electricity also will result in changes to ComEd ’s PPO rate. ComEd is required to offer the PPO rate to most commercial and industrial customers until 2007, as an alternative to ComEd ’s traditional bundled rate. The PPO rate is reset annually, and requires ComEd to sell the electricity at the "market value" price plus the CTCs. In recent years however, competitive suppliers have complained that the "market value" in the PPO rate was too low, stifling competition. The Orders will result in an increase in the PPO "market value" and, in turn, provide suppliers with a renewed opportunity to compete in Illinois.

The Orders also allow all customers with demands over 400 kW to have custom CTC calculations.This change will level the savings among customers in the smaller customer classes and should provide competitive suppliers with additional opportunities to present better value to customers in the Illinois market.

The Orders specify the method and calculation of Delivery Services Tariffs - the amount collected by ComEd for the distribution and transmission of electricity. Under the settlement agreement, these costs likely will remain constant through December 31, 2006, with a one-time opportunity for rate adjustment in 2005 if the DST revenue are significantly out of sync with projections.After 2006, ComEd may file for new delivery services tariff rates to become effective in 2007.

ComEd is the "Provider of Last Resort" for all customers in northern Illinois, including those customers with large, industrial loads. That is, if customers could not find an economic alternative in the competitive market, they were able to take service from ComEd under its standard bundled rate option, Rate 6L. However, this spring, ComEd ’s largest customers will have to make a choice between staying with ComEd ’s standard rate, opting for service from a competitive supplier, or taking service under an "hourly energy price " option.

For ComEd largest customers (with peak demands of 3 MW and greater), the Orders mean that after their June 2003 billing period, if they enter the competitive market, they no longer will be able to return to Rate 6L. ComEd plans to propose a similar restriction to apply to 1 MW and greater customers taking competitive service in time for its June 2004 billing period. Instead of returning to the safe harbor of their bundled rates, when these customers return to ComEd for bundled service, they must take service under an Hourly Energy Pricing rate (Rate HEP) or a Monthly Energy Pricing rate (Rider MEP). Both Rate HEP and Rider MEP have a market-based component tied to short term markets and include a charge similar to the CTC.

There are risks and potential rewards with each service option. To take full advantage of these opportunities, customers must make decisions before the start of their June 2003 billing periods.

The settlement agreement that spurred the ICC ’s action contains provisions for the city of Chicago and BOMA members to receive additional funds. These funds may provide further opportunities for certain customers.

The city will receive $21 million dollars for energy and environmental programs, while Cook County will receive an additional $3 million dollars for energy and environmental programs. These funds will be paid in four equal installments over the next three years.

For customers who were members of BOMA as of December 31, 2002, ComEd agreed to provide $11 million to reimburse building owners and managers for the costs incurred to comply with the emergency generator or alternative minimum requirements of the 2000 amendments to the city ’s Electrical Code. The amendments to the Code required most high-rise buildings to install on-site generation for emergency lighting and exit systems prior to January 1, 2003. The city adopted the requirement as a system measure in the wake of the electric outages that occurred in the downtown area during the summer of 1999.

Energy lawyers at Piper Rudnick help clients develop solutions and strategies arising from the ongoing deregulation and restructuring in the Illinois energy industry. Customers participating in the restructured energy markets must be sufficiently protected against unique risks when entering into contracts with energy suppliers. The firm has extensive experience in negotiating transactions for industrial and commercial customers with the new competitive energy suppliers, as well as traditional public utilities. Our attorneys are ready to assist customers in evaluating these new rates, tariffs and options from ComEd, submitting the necessary notifications and documents to ComEd, and evaluating offers and negotiating agreements with competitive suppliers.