Electricity Rates Rising in Illinois

I missed this report; some details

JAMES CLAYBORNE, State Senator: The whole purpose of deregulating is to create more competition and create more choice, in terms of suppliers coming into the residential market, as well as industry, creating industry where they will -- they do nothing but produce power. And as a result, that should cause rates to go down, should cause more competition.

But because we kept the rates low for so long, that the competition was never generated. So if we extend the rate freeze, then what happens at the end of the rate freeze? There's still no competition.

That sounds like a no-brainer to me, but I've never heard it before.

Economist Lynn Kiesling says, because of the freeze, true deregulation has not been allowed to happen in Illinois yet, which is why prices are so high. The only way to get prices down, she says, is to enable competitors to emerge.

LYNNE KIESLING: My vision of the future for electric power would be to have a variety of competing retailers offering differentiated products and services to residential, commercial and industrial consumers, so that customers have a lot of retail choice, and are empowered to choose, and to take control of and manage their own energy use.

The People's Republic of Illinois?

House Speaker Michael Madigan, responding to public outrage over unexpectedly high electricity bills, introduced legislation Tuesday that would put Illinois in the business of building power plants.

Check out the comments, too.

Ameren

The current problem began in 1997 when the Legislature froze electric rates as part of a deregulation plan. Officials hoped more power companies would enter the market and drive down prices. That didn’t happen and St. Louis-based Ameren took control over several Illinois electricity providers. When the freeze ended, rates soared -- especially for Ameren’s customers in central and southern Illinois.

Our position has been that extending the freeze was not in anyone’s best interest. We felt the increase should be phased in over three years. Much blame should go to the Illinois General Assembly, which failed to do anything in the weeks and months leading up to the end of the freeze.

Ameren officials, however, have completely botched the transition to the higher rates. Failing to inform customers that Ameren was eliminating the price break for all-electric users and dropping the phased-in rate increase are inexcusable.

Agreed so far. But is this the best solution?

Despite Emil Jones’ one-man stand, Illinois legislators, Gov. Rod Blagojevich and the Illinois Commerce Commission need to step in and help Ameren officials clean up this mess.

More concessions to customers mean further downgrading

Even though the new rates have been put in place and even though it's possible that legislation designed to roll back the hikes maybe avoided, Moody's said, last week's committee vote "is a further sign of continued political intervention in the utility regulatory process, and the regulatory environment is no longer supportive of an investment grade senior unsecured rating for ComEd,'' Moody's said.

... Moody's...didn't change its Baa2 rating on Com Ed's "secured" debt -- debt, that is, which is backed by assets just as a home mortgage or a car loan is.

But for unsecured debt, the rating agency did cut. It noted a vote last week in the Illinois Senate's Environmental and Energy Committee. The committee members voted to include ComEd in a proposed rate freeze.

"It is not certain that this bill will be enacted into law as a negotated outcome remains possible," said Moody's, noting that a negotiated compromise "could involve concessions by the company." It appears, Moody's said, that "any resolution (of the tussle with lawmakers) would likely produce financial ratios for ComEd that are weaker than previously expected."

The political pressure reflects major rate hikes that both ComEd and Downstate electricity provider Ameren put in place January 1, under terms of an earlier agreement in which both companies held rates flat for a decade.

The big hikes have generated consumer anger, and state politicians have been moving to address the issue.

Even though the new rates have been put in place and even though it's possible that legislation designed to roll back the hikes maybe avoided, Moody's said, last week's committee vote "is a further sign of continued political intervention in the utility regulatory process, and the regulatory environment is no longer supportive of an investment grade senior unsecured rating for ComEd,'' Moody's said.

ComEd, Moody's elaborated, "will likely need to offer additional concessions to certain customer classes in order to head off passage of rate freeze legislation."

Moody's said it is continuing to review for possible downgrade ComEd.

I defended Ameren, but

Gary Rainwater, the CEO of Ameren, recently wrote two letters. One was to the workers and the other was to management.

Both letters started the same. "Without question, 2006 was an exceptionally difficult year for Ameren. From operational and weather-related challenges to public relations and political issues, Ameren's employees were truly tested this year."

Then he announced some bad news. Earnings per share for the year were $2.66. That was below the target level that would mean bonuses. For the worker bees, the magic number was $3.15. For management, the magic number was $2.95.

That seems odd, doesn't it? A lower standard for management? Still, it wouldn't seem to matter. Neither number was met.


Let's read more of Rainwater's letters. In his letter to the workers, he continued with bad news. Because the target EPS was not met, there would be no bonuses. But the letter to management employees contained a paragraph that was not included in the letter to the workers.

"At its February meeting, Ameren's Board of Directors recognized the exceptional efforts of management employees in dealing with the events of 2006, as well as several events outside management's control. As such the board, in accordance with Ameren's incentive plans, adjusted the 2006 incentive to an equivalent EPS of $2.99."

Blagojevich thinks he can run a utility

State questions utility cutbacks

State regulators are demanding answers from utility Ameren Corp. about its threats to lay off workers, reduce maintenance and halt an effort to help customers hit by huge rate increases.

The Illinois Commerce Commission sent a letter Wednesday questioning why the power company would have to take those steps just because its credit rating has been downgraded to "junk" status by an investor service.

Illinois' electricity business is in turmoil because of the expiration in January of a 10-year freeze on prices.

The freeze was part of a deregulation plan. Officials hoped more power companies would enter the market and drive down prices. That didn't happen and when the freeze ended, rates soared -- especially for Ameren's customers in central and southern Illinois, some of whom saw their bills double or triple.

...

Ameren spokesman Leigh Morris said the company was reviewing the ICC letter.

But he said the lower credit rating has an immediate impact on the company because it raises the cost of borrowing money and making purchases.

"If you're spending more money on debt service, you have less left to spend on your core business," Morris said.

...

In response to howls of protest over rate increases, lawmakers are considering various plans to roll back rates, including one measure that would apply only to Ameren.

Ameren says that would mean financial devastation, and Moody's Investors Service agrees. It lowered Ameren's credit rating because of the possibility of legislative action.

Before Moody's action, Ameren had warned that a downgrade would mean:

-- layoffs

-- postponing tree-trimming and other "reliability" projects

-- delaying electricity connections for new homes and businesses

-- responding more slowly to customer calls

-- dropping rebates and other proposals to ease the pain of rate increases.

The Commerce Commission said Wednesday that it's "very concerned" those steps would interfere with the safe, reliable service Ameren is required by law to provide.

The commission also noted that Ameren's subsidiaries could cut investor dividends, executive salaries and advertising expenses before cutting service.

...

Both Gov. Rod Blagojevich and Attorney General Lisa Madigan have questioned the legitimacy of Moody's decision to lower Ameren's credit rating. They have hinted that Moody's might be trying to scare lawmakers into dropping the rollback idea.

Morris scoffed at that suggestion.

"I think anybody who has doubts about it is doing the equivalent of sticking their head in the sand," he said. "The integrity of the rating agencies is beyond reproach."

Paul Justice, an analyst who follows the electric industry for Morningstar Inc., said both Ameren and regulators appear to be posturing to an extent. But he added that the rating downgrade would put financial pressure on Ameren.

"Will this force them into insolvency? No. Will it in the longer run? It has that possibility," he said.

Ameren scraps plan for customer rebate

Ameren Corp. will scrap a planned $20 million electric-bill credit, may lay off employees and eliminate portions of its energy assistance programs, company officials said Tuesday.

The moves come after Moody's Investor Services downgraded credit ratings for Ameren's Illinois utilities to junk status, just hours after the company received Illinois Commerce Commission approval to give residential customers an automatic one-time credit on their electric bills.

The proposal also would have eliminated interest charged to customers who phase in higher electric rates over the coming years.

Ameren President Scott Cisel first announced the relief plan last month while customers lambasted the company for higher electric bills. The company had been under intense pressure from state lawmakers as it attempted to increase rates.

Ameren's rates were expected to rise an average of 55 percent for customers when a 10-year rate freeze ended in January. But some residents and businesses have complained that bills doubled or tripled under the new rates.

Company officials said they would inform the state's utility regulators of the decision to eliminate the credit, but no notice had been given as of Tuesday morning.

"There is a provision in those programs to withdraw them in the event that our credit ratings are downgraded," spokesman Leigh Morris said.

Morris said other cuts, which would include laying off employees and nearly all of Ameren's contractors, are "under study right now."

Utilities in Illinois, including Ameren, have claimed they could face bankruptcy if forced to provide electricity at a higher cost than they could recoup from customers.

Paul Justice, an analyst who follows the electric industry for Morningstar Inc., said the downgrade shows there's some truth behind the utilities' bankruptcy warnings.

"Once you start getting into the business of selling goods for less than you originally paid, it's the start of an unsuccessful business plan in any industry," he said.

Illinois Gov. Rod Blagojevich, in an interview with The Associated Press, questioned whether Ameren's bond-rating was lowered for a legitimate reason.

"It seems like an interesting time for that to happen, after they just raised rates," Blagojevich said. "I'm very skeptical."

He insisted Ameren and ComEd can absorb a rate rollback without suffering a financial meltdown, and said he is working behind the scenes to roll back rates and freeze them at their old levels.

Moody's Vice President Michael Haggarty said the downgrade was prompted by fears that the state would do just that, making the utilities a credit risk for investors.

The utilities' debt would become more expensive with the downgrade, make it more costly to acquire new debt, and likely cause institutional investors to shy away.

So after a ten year rate freeze, prices are about to rise. The customers howl at the sudden price rise, and the politicians respond by mooting a further price freeze, so the electric company panders to them, offering residential customers an automatic one-time credit on their electric bills. But it anticipates trouble. As a result, Moody's Investor Services downgrades their credit ratings, and so the electric company not only proposes rescinding the credit, but even laying off employees and contractors. There are controversies regarding Moody's and other credit raters, but without evidence to the contrary, isn't it more likely that the electric companies are hurting after being unable to pass their costs on to their customers, as the Morningstar analyst says? How does Blagojevich know that Ameren and ComEd can continue to function? Isn't it likely that Moody's is right, and lower rates are going to hurt them? And now the politicians suggest that Ameren's subsidiaries could cut investor dividends, executive salaries and advertising expenses. So they're experts in running a utility now. Why are they so worried?

Phil Adams, senior investment grade analyst with Gimme Credit, which researches corporate debt, said Illinois does not want to be in a position where its utilities are financially weakened. Generating companies will demand more for electricity purchased in the spot market, he said.

"It provides an advantage to the power supplier and that power could be very expensive," Adams said.

Of course, down in Carbondale, Brad Cole wants to take over the business of supplying electricity.