Risk Management: Should the public or private sector supply power to Illinoisans?

Jun 1, 2007

For more than seven months, Illinois lawmakers have been feeling political heat from consumers over rising electricity bills. Some even faced death threats. In their defense, lawmakers pounded their fists, raised their voices and resorted to sulking in frustration as their legislative leaders traded procedural jabs. House Speaker Michael Madigan and Senate President Emil Jones Jr. have each proposed measures that call for the state to intervene in setting electric rates.

Yet nothing has changed, and such political gamesmanship is tainting confidence in the state's ability to ensure consumers get access to an essential utility at an affordable rate.

As the debate intensified this spring, Madigan announced a late-in-the-game proposal that would open the door for the state to become the sole power provider. He proposes creating a new Illinois Power Authority, a five-member nonprofit agency that would either buy power or generate its own power to resell to all types of customers. 

"Power can be supplied by governments at a lower cost than by private investor companies," Madigan asserted during an April House committee meeting.

He's right, according to the U.S. Department of Energy's Energy Information Administration. Investor-owned utilities supply power to residents at a 10 percent higher rate than publicly owned utilities. Private utilities' commercial rates are 9 percent higher. 

Illinois' 2007 electricity rates, however, increased much more than that, between 26 percent and 55 percent on average, after they had been frozen for a decade as part of a 1997 state law. In a deal with utilities, lawmakers back then agreed to decrease and freeze rates, promising that the price-setting process would transition from a state-regulated to a deregulated system once the law expired.

Now that the law is off the books, the state's two main investor-owned utilities are buying power at market rates. Those costs are passed along. In turn, most Illinois customers are suddenly paying more than the artificially low rates they paid under the freeze. 

Lawmakers, lobbyists and consumer advocates have known for years this would happen, but they didn't know the state's regulatory Illinois Commerce Commission would restructure the way utilities buy and distribute power through an auction. As a result of the September 2006 auction, utilities bought power in bulk at a fixed price. Business and residential customers who use all-electric heat are paying the greatest increases, anecdotally as high as 300 percent.

The uproar about those skyrocketing electricity bills led Madigan to ask whether there's a better way. Not just to alleviate the pressure of the 2007 rate hikes, but to ensure that all types of residents and businesses are protected as energy demand steadily climbs along with prices. More expensive natural gas and stricter federal air pollution regulations also could spur additional changes in the electricity industry and heighten the importance of diversifying sources of power.

If lawmakers believe Madigan's public power idea would provide the best long-term solution, Illinois would become one of the few states with the authority — and the associated risks — to buy power or generate its own power, serving all types of customers that could include the investor-owned utilities at the center of this spring's electricity rate debate.

Currently, 95 percent of Illinois customers are served by either Commonwealth Edison, an Exelon subsidiary that serves northern Illinois customers, or Ameren Illinois, an Ameren Corp. subsidiary that serves most downstate customers. The private, for-profit companies are owned by investors. They buy electricity on the wholesale market and resell it to residents, businesses and municipalities.

There are other suppliers in Illinois. More than two dozen smaller private cooperatives are owned by their members. Most own their wires and distribute power to rural areas, while two generate power for cooperatives in their regions, according to John Freitag, vice president of operations for the Association of Illinois Electric Cooperatives trade association based in Springfield.

Ron Earl, chief executive officer of the Illinois Municipal Electric Agency, testified to the House committee in April that the cooperative wasn't required to participate in the 1997 rate freeze. It didn't have to buy wholesale electricity in the Illinois Commerce Commission's 2006 auction either. "Our current wholesale costs are about 20 percent below the cost resulting from the auction," he said.

While electric cooperative customers aren't currently affected by the 2007 rate increases, that could change, according to Freitag. "Directly, right now, there's absolutely no effect on any of the cooperatives in Illinois because they operate differently. For those cooperatives that are receiving power from Ameren or might in the future, when their contract runs out, they're going to have to go out onto the open market to purchase a new source of power." 

Another power auction is scheduled for January, and such consumer advocates as Illinois Lt. Gov. Pat Quinn, the Citizens Utility Board and state Attorney General Lisa Madigan argue the process violates the intent of the 1997 state law because it's unfair and controlled by corporate interests.

"Right now, with this reverse auction concocted by the utilities, we're put in a severe disadvantage," Quinn says. 

"The whole idea of the Illinois Power Authority is to even up the odds. [It's] designed to step in and say to the Commerce Commission, 'If you're not going to protect consumers in the procurement of power, consumers are going to have to protect themselves and need the power authority to do that."

Lisa Madigan went as far as filing a complaint with the Federal Energy Regulatory Commission to allege that 15 power companies manipulated the power auction and cost consumers more than $4 billion. The complaint cites evidence, for instance, that ComEd's parent company, Exelon Gener-ation, won 97 percent of the 41-month ComEd contracts.

The commission stands by the auction, one of 12 options the panel considered in carrying out state law. "The only viable method was the auction," says Chairman Charles Box. "You have to go on what's in the record. There was no other viable alternative put forth by the attorney general or [the Citizens Utility Board] during the proceeding." 

The commission, however, has launched an investigation into the way in which Ameren and ComEd spread the burden of increased rates on different classes of customers, mainly the residents and businesses that use electric heating. The investigation is aimed at determining whether the utilities should have adjusted some rates for different types of customers, says Beth Bosch, commission spokeswoman.

Speaker Madigan, who once served as an administrative law judge for the commission, also criticizes the agency as ineffective and weak. In fact, his measure removes the panel from overseeing the proposed power authority.

"It's an acknowledgement the ICC has been a complete failure in terms of the competition and in terms of what was to have happened over the last decade," says his spokesman, Steve Brown. "And it's an acknowledgement that the utilities have failed to do what they promised."

The legislation says: "There is a lack of confidence that the electricity needs of residents, commerce and industry can be supplied in a reliable, efficient and economical manner in Illinois because ComEd and AmerenIP, AmerenCIPS and AmerenCILCO have increased their rates unreasonably and unnecessarily, repeatedly threatened bankruptcy, failed to maintain their transmission and distribution systems in a manner that ensures reliability and in some cases failed to restore power to customers for more than a week after an outage."

Madigan's alternative simply takes what's being done on a local basis in Illinois and expands it to a statewide market, Brown says.

Consumers in 42 Illinois municipalities are shielded from the 2007 rate increases because their local governments own and operate electric systems — the wires, the utility poles, the transformers and the meters. About 30 of the municipally owned utilities buy power from the Illinois Municipal Electric Agency and distribute it to their residents. And they set their own rates.

Springfield's electric customers have protection for now, too. The City Water, Light and Power utility generates its own electricity and provides customers with cheaper, local power. 

This spring, the city also started building a $450 million coal power plant producing 200 megawatts of electricity, enough to supply about 80,000 homes at any given time. The new plant is expected to reduce carbon dioxide emissions by about 32 percent from current levels in 2010, and sulfur dioxide emissions by about 94 percent, says spokesman Ray Serati. The city also agreed to purchase 120 megawatts of wind power.

Madigan cites Springfield as an example of one way the state could help control electricity prices.

"If the city of Springfield can provide good, reliable power at a lower cost than a private investor company, then we ought to at least consider the creation of the Illinois Power Authority," he said to the committee in April.

Fifteen other states already have state-owned public power systems, but most are more established and already own their power plants and transmission lines. The Tennessee Valley Authority has been around since the Great Depression. So has the New York Power Authority, the nation's largest state-owned electric utility — and the model for Madigan's idea.

But New York has at least one major difference: Niagara Falls. The dam generates 2.4 million kilowatts of hydroelectric power. That is combined with power from seven other hydroelectric facilities to generate 75 percent of what the public authority generates; 19 percent of the state's electricity is generated through renewable power. 

By state and federal law, the power authority distributes that power to 51 electric systems and rural cooperatives, industries, investor-owned utilities, public schools, hospitals, streetlights, subways and other governmental entities, says spokesman Michael Saltzman. He adds that public facilities save about $100 million a year through energy efficiency initiatives and such other services as solar power.

The authority's projects tended to respond to urgent public needs. For instance, one reason the Niagara Power Project was created was because a private utility collapsed into the river, and the authority stepped in to help energy-intensive industries keep their cheap source of power, Saltzman says.

Madigan's proposal mirrors the New York Power Authority's oversight by creating a board of trustees appointed by the governor and confirmed by the state Senate. The authority finances projects by floating bonds and using revenue from electricity sales, just as Madigan proposes, with the exception that the Illinois panel couldn't hold more than $4 billion in debt. Illinois' board members would serve five-year terms, and they would have to be attorneys, accountants and engineers with at least 10 years of experience. Two would have to have a decade of experience in economics, finance or environmentally related fields. 

Republican Rep. Bill Black of Danville questions why the authority wouldn't be subject to oversight by the Illinois Commerce Commission.

"It may be that that is a warning shot to the Commerce Commission: If you don't get more involved in this process, I think I can come up with something that may in fact replace you in the near future," Black says. "The speaker is generally a chapter ahead of anybody down here."

But Black adds he doesn't understand Madigan's motivations and that he opposes the idea of the state building new power plants or taking over existing plants as "absolutely prohibitive."

Rep. George Scully, a Flossmoor Democrat, is more optimistic. "I start from the basic premise that government should step in when the private sector is unwilling or unable to deliver service. At the present time, I believe that the public sector has failed in this arena. Therefore, we should definitely consider government stepping in to provide that service that the private sector cannot or will not provide properly."

One group supporting the idea is the Illinois Coal Association. Not only would the Illinois Power Authority be required by law to build its first facility as a coal-fired power plant, but all of the authority's coal plants would have to use only Illinois coal.

The language about setting rates, however, is much more vague, something that irks Ameren and ComEd officials who testified to the House committee in April. While both utility executives said they could work with the state if a public power system were approved, they weren't so keen on the language in the measure that would allow the state, essentially, to compete with them to supply retail power.

"The threshold question is, who is doing what?" said Craig Nelson, vice president of Ameren Illinois companies. "The creation of the authority does not relieve us of our obligation to locate and acquire power supply for our customers."

He added that the expected savings wouldn't appear for years, maybe even a decade because it takes that long to plan and build a new coal-fired power plant.

Tom Overbye, an engineering professor at the University of Illinois at Urbana-Champaign, teaches a course in analyzing the power system and restructuring the electricity industry. He says he also doesn't know whether the public power authority would be able to secure lower prices for the average customer. But he could see the state being able to secure a better deal for the all-electric customers. "I think that they could get a lower price for the electric heating customers because most of their electricity is [used] at night, and at night, the price of electricity is lowest."

In the current rate-setting process, Overbye says, the auction charges a fixed rate regardless of whether consumers use their power at night or during the daylight hours of peak demand. 

He's immune from the 2007 rate increases because he gets his electricity from the Eastern Illini Electric Cooperative, a nonprofit, member-owned utility based in Paxton that serves 13,000 meters in a 10-county area. It gets its electricity from Jacksonville-based Soyland Power Cooperative, which provides wholesale electricity to 11 distribution cooperatives in central Illinois. But he says all customers can expect to eventually see an increase in their bills.

"The fact that the base price of electricity has gone up, we're not going to be able to do much about that," Overbye says. "But I think we need to be more creative in meeting the needs of special customers, like the electric heating customers."

It all depends on whether lawmakers decide that the public, rather than the private sector, should assume the risk for electric crises or bad investment decisions. 

If investor-owned utilities invest in a power source that later skyrockets in price, for instance, shareholders foot the bill with some cost trickling down to customers, Overbye says. But if the state sinks a lot of money into, say, coal-fired power plants and then the federal government tightens restrictions, coal prices could drastically inflate. Taxpayers could get left holding the bill. 

 

Illinois Issues, June 2007