Profiting on guaranteed revenues? ComEd says this is just fair – Crain’s Chicago Business

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There was one lucrative benefit missing from the guaranteed-revenue playbook, however. And ComEd wants it back.

The utility is asking the Illinois Commerce Commission to preserve the authority—written into the 2011 law but not in the 2021 statute—to add its normal regulated profit rate to those yearly true-up charges. Staff of the ICC recommends ending the practice because they say it benefits shareholders at ratepayers’ expense, according to ICC filings.

ComEd is asking the ICC to hold an oral argument on the issue, and the commission is scheduled to consider that request today. Staff of the ICC is recommending against, arguing that the issue has been fully aired in written filings with the commission.

The commission hasn’t had leeway to rule on the matter since enactment of the 2011 Energy Infrastructure Modernization Act, which took away much of the regulators’ authority to set rates and made most of it a formulaic affair. Enactment of that law played a central role in the elaborate bribery scheme to which ComEd admitted in 2020—focused on securing the favor of Michael Madigan, then the long-serving Illinois House speaker and the most powerful politician in the state and now fighting federal corruption charges.

With interest rates rising, the issue is more financially meaningful than it used to be. ComEd’s position is that it should be able to add its total authorized rate of return—a combination of debt and equity—when it trues up its revenues.

The policy won’t go into effect until 2024, after the formula law’s expiration. But when it does, current interest rates could put that return at more than 7%. In 2020, ComEd’s revenues fell short by $33 million. A repeat of that would mean an extra $2.5 million or so that ratepayers would have to cough up.

ICC staff believes the interest rate imposed in collections of those revenue shortfalls should be much lower—about 3.5% at today’s interest rates.

In the staff’s view, ComEd bears no financial risk in the guaranteed-revenue approach the state has taken to utility regulation since 2011. So, the staff says, ComEd’s cost to finance the shortfall during the two years it takes to be made whole should be lower than the cost of financing its normal operations.

“Whether the company accesses capital externally or internally, the cost of that capital should reflect the underlying risk of the asset being financed, in this case the difference between the commission-approved revenue requirement and the revenues the company actually collects each year from ratepayers,” according to testimony submitted Sept. 1 by Sheena Kight-Garlisch, senior financial analyst with the ICC.

She notes, too, that Ameren Illinois, the state’s other big electric utility, serving downstate Illinois, didn’t ask for the same generous treatment in its proceeding to set the future terms of these revenue true-ups.

Says ComEd in an emailed response to questions, “(We) cannot speculate as to why Ameren has requested the treatment that it did, but it may choose to address these costs in other ways, such as in its cost of cash working capital.”

The utility notes that the true-ups work in customers’ favor when it collects more in a given year than was authorized. And it’s proposing to apply the same markup to ratepayer rebates as well.

Overcollection does happen. In 2021, for example, ComEd collected $9.8 million more than its approved rates called for.

The utility adds: “ComEd is not ‘profiting’ from ‘guaranteed revenues.’ “

It dismisses the ICC staff’s argument that there’s no risk inherent in the later recoveries of revenue shortfalls, and so the cost of financing that should be minimal. “The risk of the reconciliation alone does not drive that cost—ComEd incurs financing costs to raise capital regardless of what it is using the money to finance, just as does every other person or enterprise. Utilities are supposed to recover their cost of service—no more and no less. Both paying and charging the company’s cost of capital—symmetrically—on over- or under-recoveries is the only way to do that.”

The issue arises as the commission is set early next month to approve the last rate hike for ComEd under the controversial formula approach. On the table is a $199 million increase for 2023, which is expected to be approved given how the old law ties the regulators’ hands and will hike the average household electric bill by about $2.20 a month. That $199 million includes some $60 million for past amounts that ComEd says it was owed but didn’t receive. The interest charged on those amounts is $5 million.

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November 17, 2022 at 07:05AM

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