Point of View: Some Additional Tidbits on Electric Rate Freeze

This week concludes my research on the outrageous rate increases on all-electric buildings. First, I discovered some unsettling findings about Midwest Generation, one of the prominent suppliers of power in Illinois. I follow this with reasons why the huge rate increase imposed on consumers in all-electric buildings is not only unfair but makes little economic sense. And then there occurred during the past week some very modest progress in rolling back the electrical rate increases.

Richard Rudberg Broken Promises
Broken Promises

Some Troubling Findings

It is now generally agreed that there were only two bidders in the famous “reverse auction” that took place last October. That auction was the basis for the increase in electric rates imposed on consumers. Although we had originally been told that some 15-20 bidders had participated, the effective number was only two: Exelon (to whom ComEd sold their nuclear facilities) and Midwest Generation, a non-regulated power production company that is part of the Southern California Edison (SCE) consortium.

Richard Rudberg Electricity Table
Electricity Relationships

Exelon is well known to consumers in Illinois as the holding company of ComEd, a regulated utility. Similar to ComEd, SCE, a regulated utility serving much of Southern California, sold its generation facilities to Edison International of California (Edison), a non-regulated subsidiary. Later, Midwest Generation was formed by the SCE consortium to operate 12 generation plants that Edison had purchased in Illinois. With that acquisition, Midwest became a major player and the only significant competitor to Exelon.

SCE and their non-regulated production company, Edison, were also important players in the California energy crisis of 2001-2002. In a 2002 review of that fiasco, the Los Angeles Times concluded that SCE “helped shape the deregulation in California in a way that benefited them early on, and then when things went awry, they leaned on the state regulators to bail them out.” Further, it was reported that while SCE was facing near bankruptcy, its unregulated subsidiary made record profits. According to news accounts, the recent auction process in Illinois was designed by the bidders—Edison and Midwest Generation, and Exelon. And, of course, rates in Illinois are at record highs and profits of the unregulated producers are also, no doubt, at record highs.

Our narrative sounds suspiciously like the California story, except in our case, the regulated utility also benefits—ComEd's profits up by over 70% in the first quarter. As with California, the consumers of electric power are the major losers.

Richard Rudberg Money Down Drain
Money Down the Drain

ComEd's Stealth Rate Increase

ComEd increased the unit electricity rates (charges per kwh) of residents in all-electric buildings by 62%. Another 20% or so increase in charges per residence is due to the added assessment for common areas in the electric-heat condos. Thus, the overall added charges to residences are up as much as 80%. This may be contrasted with the reductions in rates promised as a result of deregulation. A freeze is needed to review the applicability of deregulation to the electric power industry. A freeze is also needed to review ComEd's rate increase pushed through compliant regulators unnoticed by the public. Some reasons ComEd's recent actions are without merit are as follows:

    The irregular unilateral elimination of longstanding rate agreements with residents in all-electric buildings, agreed to in secret by government regulators;

    Concessions in rates given all-electric buildings reflect real economic values that have not gone away. These include the large quantities purchased by electric-heat consumers, some 10-20 times more electricity than non-electric heat consumers, thus justifying the quantity discounts given this category of consumers;

    Lower charges for electric heat are justified by the fact that production facilities are in surplus to demand in the winter season, i.e., winter power is the cheapest power produced by the suppliers and rates for electric heating should reflect this; and

    ComEd's excessive increase in profits for January-March 2007, reported to be more than 70%.

Richard Rudberg Tokens

Token Concessions

The extraordinary increase in profits experienced by ComEd amounts to a public relations nightmare. ComEd decided to make some token temporary concessions to consumers protesting the rate increases.

Two changes in rates that ComEd has speedily pushed through the Illinois Commerce Commission (ICC) are meant to pacify residents of all-electric buildings. Although the changes represent movement in the right direction, they are minimal and short term. But most important, from ComEd's perspective, the changes will have the effect of reducing reported profits at a critical time when ComEd and rate increases are in the headlines. The more significant of the concessions provides for a reduction in the increase in the rate for common areas in all-electric buildings, from 70% to 24%, but only for the current year. Presumably, the rate increase will return to 70% after 2007 when electricity is no longer a headline issue. The second concession provides a one time grant of $33 to customers in all-electric buildings. The rationale for this token amount is mystifying.

We need a rate freeze, both to re-examine the purported value of the deregulation theory to consumers in Illinois and, even more important, to open up the rate-setting process, now conducted by ComEd in secret, to public review.

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