The Emperor’s (ComEd’s) New Rates

Our friendly neighborhood electric utility, Commonwealth Edison – affectionately known to many of us as ComEd, or by more derogatory terms – filed their latest electricity rates with the Illinois Commerce Commission (ICC) earlier this week.  And, oh my goodness, it’s a significant decrease in what ComEd will be charging the residents and businesses of north eastern Illinois for electricity supply!  I hope Beelzebub is enjoying his seat behind the penalty box, because surely – Hell hath frozen over!

But, is this really a surprise?  If you’re an energy nerd like I am (Nerds Rule!), this doesn’t come as much of a surprise.  The new rate is actually a little lower than I had imagined, but it’s not too far from what I was expecting.  There are several layers to this issue, and I’m going to peel each one back for your examination and understanding over the course of this article.  So, if you want the Reader’s Digest version, just read the next paragraph and you’ll be fine.  If you want a deeper understanding of what’s going on – just keep reading.  I’ll be going far enough down the rabbit hole to completely satisfy the energy nerd inside me.

ComEd’s new rates are much lower, so everyone should be happy, right?  Well, the new Electricity Supply Charge rates are much lower than the current rates, but that’s not the full story.  The supply charges from ComEd are made up of the Electricity Supply Charge, the Transmission Services Charge, and the Purchased Electricity Adjustment.  The new Electricity Supply Charge from ComEd is 4.597 c/kWh for Summer (compared to 6.080 c/kWh), and 4.559 c/kWh for Winter (compared to 7.491 c/kWh).  This is a fairly large drop, but these rates won’t actually show up until your June electricity bill.  The current Price to Compare for ComEd according to the ICC’s Plug-In-Illinois site is 8.302c/kWh, but the new Price-To-Compare beginning in June 2013 will be 5.547c/kWh.  (The Price-To-Compare includes the Electricity Supply Charge and the Transmission Services Charge, but does not include the Purchased Electricity Adjustment.)  This is a savings of nearly 3c/kWh!  Drinks on ComEd tonight!

I’d hold off on that for at least a little bit.  ComEd’s new rates won’t be in effect until June.  This means that some of us will see the new rate as early as the 3rd or 4th of June, while some of us won’t see the impact of the new rate until the beginning of July.  I know – it’s totally unfair.  But, because of which meter read day you are on (there are 21 options), and when your electrical meter is read, different people will see the impact of this new electricity rate at different times.  Awesome for the folks on meter read schedule 1, but not so good for the folks on meter read schedule 21.

If you are fond of doing the math (like I am), you’ll notice that the values I indicated above don’t quite add up.  That’s because of the Transmission Services Charge.  The current Transmission Services Charge is 0.811c/kWh.  And, between now and June, ComEd will also be filing an update to their Transmission Services Charge.  This rate is expected to increase with the next ComEd filing.  The new Price-To-Compare for June from the ICC’s Plug-In-Illinois even takes into account a higher 0.95c/kWh Transmission Services Charge.  I’m expecting it to be slightly higher than that, but we’ll have to wait until ComEd files its new rate with ICC to know for certain.

(What a second – even with the Transmission Services Charge, the math doesn’t quite work out.  Why is that?  Well, there are two additional factors that affect the Electricity Supply Charge.  These are the Incremental Supply Uncollectible Factor (ISUF) and the Supply Base Uncollectible Cost Factor (SBUF).  The Electricity Supply Charge is multiplied by these two factors.  These factors are typically set in December and are effective from January to December.  So, ComEd shouldn’t change those factors until December, but I wouldn’t be surprised if they tried.)

Let’s do a quick recap of what we’ve already covered.  Sometime in June (though not until July for some of us), the Electricity Supply Charge will decrease and the Transmission Services Charge will increase, resulting in a 2.76c/kWh in savings.

At this point, most people have probably stopped reading.  But, for those of you that are still around, you’ve probably begun to wonder why there was such a drop in the Electricity Supply Charge in the first place.  The answer will take a little bit of a history lesson, and the electricity price didn’t so much drop as it was artificially high for a long time.

ComEd used to be allowed to procure all of its own electricity in whatever that it deemed fit.  It was still subject to oversight by the ICC, but somehow it had a fair amount of freedom when it came to purchasing long term electricity contracts.  About six years ago, ComEd purchased long term electricity contracts from Exelon Generation to provide electricity for the following six years.  The ICC had several concerns about how this contract was awarded – not the least of which was that Exelon Generation and ComEd are both owned by Exelon Corporation.  In order to prevent this from happening, the state of Illinois created the Illinois Power Agency (IPA) to negotiate electricity contracts on behalf of ComEd and Ameren.  (Here’s one of my previous blog posts that provides insight into how the IPA purchase power for ComEd and Ameren)  So, the long term electricity contract that ComEd signed with Exelon Generation has been keeping our electricity rates artificially high for the last six years.  In June, that contract will expire allowing ComEd’s electricity rates to be more in line with the market’s cost of electricity.  So, for the last six years, ComEd has been charging us above market rates for electricity, and this profit was finding its way into the coffers of ComEd’s parent, Exelon.  If you’re mad as hell that you were overpaying all this time and that the regulators were asleep at the wheel when they were supposed to be watching out for stuff like this on our behalf, you’re not the only one.

Now, what’s happening with the Transmission Services Charge?  The Transmission Services Charge is what ComEd is charged for sending electricity across the PJM ISO (Pennsylvania Jersey Maryland Independent System Operator) transmission network.  If you’ve ever seen the really tall towers that hold electrical lines over long distances – these are the ones owned by the PJM ISO.  Think of the transmission charge as a toll to use these high voltage electrical wires.  Since the economy is growing, the demand for electricity is increasing.  As the demand for electricity increases, the amount of electricity that travels via these high voltage transmission lines also increases.  Since the demand increases but the supply stays fixed, the price of using the high voltage transmission lines.  (The mechanism for determining the price of the particular transmission is based on a marketing clearing mechanism, thus ensuring an efficient value transfer in the market.)  This same transmission cost is also experienced by retail electric suppliers that compete in ComEd’s territory, though they typically bake it into their quoted price.

For those of you that have been keeping track at home, you’ll notice that I’ve covered both the Electricity Supply Charge and the Transmission Services Charge, but have mentioned little about the Purchased Electricity Adjustment charge.  Don’t fret – this is our next area of exploration.  I’ve kept this one for last because of the complexity of the topic and because of how contentious of a topic it is.  The ICC Plug-In-Illinois Price-To-Compare doesn’t even include the Purchased Electricity Adjustment charge, though it can be a significant part of ComEd’s supply charges on a customer’s bill.  We’re way down the rabbit hole now!

ComEd electricity rates cut that hikes

The Purchased Electricity Adjustment charge is the reconciliation between ComEd’s Electricity Supply Charge and the market clearing price for the previous month.  This charge changes on a monthly basis, though the fee applied to the month of April is actually the reconciliation for the month of March.  To understand what to expect from the Purchased Electricity Adjustment charge going forward, first we have to understand a little bit more about the Electricity Supply Charge, and how the IPA goes about determining that price.

Every year, the IPA runs three separate auctions for electricity contracts for ComEd.  (They do the same for Ameren, but we’re just talking ComEd here.)  The first auction is for 1/3 of the electricity ComEd is going to need for the next 12 months.  The second auction is for 1/3 of the electricity ComEd is going to need from 12 months to 24 months from now.  And, the third auction is for 1/3 of the electricity ComEd is going to need from 24 months to 36 months from now.  So, if we turn that around a little bit, right now 1/3 of the price for electricity that ComEd is delivering was set two years ago, 1/3 was set last year, and 1/3 was set this year.  Normally, this works fairly well, but we’ve run into a little bit of a different situation due to what’s been going on in the Chicago area in the last two years.  So what’s so unique about this time in history?

Two years ago, the IPA ran an auction for 1/3 of the electricity that ComEd expected to have to deliver this year.  After that a small number of municipalities aggregated their citizens and chose a retail electricity supplier to provide electricity for all their citizens, thus decreasing the amount of electricity that ComEd would have to deliver this year.  And last year, the IPA ran an auction for 1/3 of the electricity that ComEd expected to have to deliver this year.  During the course of the last 12 months, a much larger number of municipalities, including the City of Chicago (which was 26% of ComEd’s residential customers), aggregated their citizens and chose a retail electricity supplier to provide them electricity.  This decreased the amount of electricity that ComEd would have to deliver in the next 12 months so much that the amounts of electricity purchased in the last two auctions for this year more than covered the amount that ComEd was expected to need.   Therefore, the IPA did not run an auction this year for ComEd’s electricity need for this year.

So what?  So ComEd has more electricity than it needs for this year?  How does that affect me?  Well, the regulations governing the use of the electricity that the IPA purchases for ComEd requires that ComEd sell any excess electricity or purchase any needed electricity on the PJM market when it’s needed.  The Purchase Electricity Adjustment reflects the cost or earnings from these transactions.  ComEd currently has more electricity than it needs, and so will be selling electricity on these markets over the next 12 months.  If ComEd is selling the electricity for more than it bought the contract for, then the Purchased Electricity Adjustment charge will be negative, and all of ComEd’s customers will effectively be paying less for their electricity than the stated rates.  If ComEd is selling the electricity for less than what it bought it for, then the Purchased Electricity Adjustment charge will be positive, and we’ll all be paying more for electricity than the state rates.  So, which type of market are we in?

This is where my predictions will get very contentious, and where I begin to look into my crystal ball.  Time for the obligatory disclaimer – the following are my thoughts based on my experience, and should not be used to place bets on the market.  If you lose all your money placing bets on the future price of electricity, I’ll feel bad, but ultimately that’s all on you.  If you make a ton of money doing the same thing, I will also not take any responsibility for your windfall.  But, I won’t be opposed to receiving a very nice present from you.  So here goes.

In the last 3 years, the price of electricity has gone down.  This is a result of a number of new wind power plants coming on-line (especially in the Mid-West) and the cost of natural gas going down due to the increase in the abundance of natural gas from fracking.  Look at what’s happened to the retail supplier rates in the last 18 months, and you’ll see what I’m talking about.  Eventually, the price for electricity in the Mid-West will go up.  We will be closing a large number of coal plants because of environment concerns over carbon dioxide emissions, and because many are near the end of their commercial lives.  But, this won’t happen for another few years.  So, because of the low cost of natural gas and the increase in wind production, I think that the price of electricity in the next 12 months will be less than it was last year and less than it was two years ago.

What does that mean for ComEd?  If I’m right, ComEd will be selling electricity on the market at a loss.  Any loss incurred in the market will show up as a positive Purchased Electricity Adjustment charge on their utility bills.  Since this cost is being borne by a decreasing number of people, the amount for each individual customer will increase over time.  Which means, the state ICC Price-To-Compare for June 2013 is 5.547c/kWh, but I’d bet that you’ll be paying closer to 6c/kWh by the time you factor in the Purchased Electricity Adjustment charge.  It’s your option to do what you will now that you know the facts.   But, even though I’m currently paying a slightly higher rate that ComEd’s new stated rate, I still think I’ll make out in the end.  (Plus, I’m supporting renewable energy every time I pay my electricity bill.  For me, it’s worth the extra $3 per month to feel warm and fuzzy every time I turn the lights on.)

The High Voltage / Low Current Wrap-up

ComEd’s new stated rates are going to be good overall, but the true benefits and costs are all in the details.  The Electricity Supply Charge may have gone down significantly, but the Transmission Charge is going up, and I suspect that the Purchased Electricity Adjustment charge will be raising the effective rate for the foreseeable future.  And, the reason the drop in the Electricity Supply Charge was so significant was because ComEd agreed to an electricity contract six years ago that ultimately had ComEd customers paying above-market electricity supply rates over the last few years.

(Obligatory cheesy sign-off below.)

Now that your charged with the truth about your electricity – make the +positive choice for you!

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