Thursday, September 07, 2006

Electricity Deregulation and Impending Chaos in Illinois

Illinois Electricity Auction Background

Illinois is about to come upon an era of electricity uncertainty. About 10 years ago a “rate freeze” for residential customers was enacted as part of regulatory “deregulation” (I hate to use that word, because it was only regulated differently) and rates have been frozen since 1997. Here is a good summary of where we are today.

In early 2006 the Illinois Commerce Commission approved a plan for an electricity auction. The ICC set up a controversial electricity auction in September and it occurred last Monday. The results will be released on 9/12 (next Tuesday). The rates will be published towards the end of September and the new rates will be effective Jan 1, 2007. Here is an excellent summary of the process (from the eyes of a company that wants to sell deregulated electricity to Illinois customers, so take it with a bit of salt).

In parallel, Commonwealth Edison (the local electricity affiliate of Exelon, the giant Midwestern utility holding company that also owns power companies and other assets across the country) is moving for a rate increase to pay for this increased power cost. ComEd asked for a big increase, but was granted a far smaller increase. Even this increase is controversial, however, and ComEd is trying to offer a phased in rate increase of 10% / year for the next 3 years, financed at 6.5% / year (meaning you are going to end up paying for the whole thing in the end, plus interest, at ComEd’s benefit).

Politicians and Posturing

ComEd is also taking out a lot of local advertisements trying to drum up sympathy, saying that they haven’t had a rate increase in a decade, and now we have to pay for the higher costs. What they aren’t saying is that we are passing the higher costs right back to the ComEd holding company Exelon, who is going to make money hand-over-fist selling back cheap nuclear power to the regulated entity who will continually cry wolf.

Illinois politicians are scrambling for survival. Lisa Madigan, the State’s Attorney General, is busy suing the state agencies that are planning this process and fighting it tooth and nail, all the more to say that she “did something” to help Illinois citizens. Of course, she probably has plenty of time on her hands since she doesn’t bother to go after the corrupt politicians that run every corner of our state, that is apparently a job for the FBI.

Rod Blagojevich, our governor, is also getting involved. He fired the head of the ICC who started this auction process and attempted to replace him with the head of the Citizen’s Utility Board (CUB), a protest group that acts on behalf of the ratepayers and fights all the rate increases and generally despises our Illinois utilities (well deserved scorn, unfortunately). He knows that high electrical rates are going to play right in the hands of his future opponents and are supremely unpopular. You don’t get to be governor in Illinois without pandering, after all – look at REPUBLICAN George Ryan freeing all the scum off death row in a pathetic attempt to win sympathy votes (enjoy your 6 ½ years in the pen, hope you rot and die there).

Likely Outcomes

No one knows what is going to happen. There are estimates that rates will not go up much at all, all the way up to them increasing 100%. I don’t want to speculate since I don’t have direct facts but it is likely that rates will rise a lot and we will need to either 1) swallow the rate increases 2) take more dire action against Exelon.

By dire action, I mean the government of Illinois seizing the power plants and just running them at cost. I know this sounds radical and anti-capitalist but the people of Illinois paid for these plants in the first place – it isn’t like ComEd’s former parent company took any risk here. They spun off the assets in a dubious Enron fever-dream and now they are worth a ton of money, and Exelon is going to spin this money into gold. Alternatively, Illinois could just make ComEd (local affiliate) go broke and demand that the parent company subsidize them; likely Exelon wouldn’t take the bait and would go the way of Entergy who let their local New Orleans affiliate go bankrupt after hurricane Katrina rather than pay all the rebuilding costs.

I think that the Illinois politicians are a crafty lot and won’t just go down to certain electoral defeat; Blogo’s firing of the ICC commissioner was a pretty big shot across the bow and I really think that he has some cards up his sleeve.

Of course, the REAL solution, which is to take down the barriers against new plant construction emplaced by the NIMBY’s and to pro-actively encourage people to site new generation in Illinois, is going nowhere. Exelon isn’t going to invest in generation with these clouds over their head, and the lead time and uncertainty is too great for anyone else to step in.

This situation is going to get worse and worse. The Midwest recently hit new electricity peaks, and New York was undergoing a series of blackouts in July when I went there to see the Colbert Report taping.

The Future

It is apparent that anyone who is relying on the utilities and governments to provide power is deluding themselves. They lack the political will to invest in new generation and transmission resources needed to meet skyrocketing demand. They refuse to face down the NIMBY’s who halt progress and scream about emissions and dog nuclear power every step of the way. This problem is snowballing, and the remaining utility companies have no incentive to “fix” the situation because they are in a monopoly, catbird seat since they own the generation and there is no financial benefit to them in adding capacity that will only compete against their assets (not to mention the risks involved with building it in the first place).

The future is local generation. People will either get their own backup generation or one for their subdivision. People will develop innovative power technologies on a local level. The market will expand.

Of course, I am talking about the rich and well-off, as well as businesses. The poor will rely on the public grid as it disintegrates and gets more costly and less effective. Like our schools and public housing, it will fall into disrepair.

I hope the NIMBY’s are happy, since rising electricity rates are the most regressive taxes and costs known to man. I don’t notice it, but the poor will have to make horrible choices between food, rent and power. This is so obvious, and they will blame everyone but themselves.

5 comments:

PS Indy From Hobart said...

Carl:

I can't believe what I'm reading? Are you a Communist? Sieze power plants? You haven't had a rate increase in 10 years and you're complaining!!???

The rest of Americans should be so lucky.

The last time I checked, in this country, Capitalism still rules. The goals of the Corporation are to make money for its shareholders, not to subsidize free electricity for its customers out of the goodness of their hearts.

Remember several Summers ago when some of the Chicago electrical grids were failing or catching on fire? What did Daley do? He threatened Com Ed with the worst thing imaginable? He threatened to open the city's Franchise for electrical distribution to the public marketplace.

Remember, cities enter into exclusive contracts with electric companies (30, 40, sometimes 50 years) to provide them with electricity. Rates are set through ICC & CUB. Daley was lucky at the time because the contract with Com Ed was coming to an end. With the threat of ending the "monopoly," Com Ed got its act together and made sure that they got their system back up in the city to support the hot summer.

My point to you is that municipalities (state and local) should make these contracts shorter. Force Com Ed/Exelon to prove themselves year after year.

Regarding your last statements, the working poor are already making choices between food, utilities, or rent. This is nothing new unless "Communist Carl" wants to have a "two-tiered" rate system: One for the poor and one for the rich.

Workers of the world, UNITE !!!

Badboy Recovered said...

CUB is going to rue the day they forced ComEd to close Zion.

Dan from Madison said...

I was going to buy some Exelon stock. Their charts look decent but they are at their year high. And they have a PE of 41 - most utilities I have invested in have PE in the teens. Low dividend too for a utility. Think I will pass. I bet there will be a lot of option action on this stock soon...like today.

Frank Borger said...

There's this old joke that describes how things work in Chi Town.

A Chicago guy takes a day off and is sitting on his porch reading the paper. A Bureau of Forrestry truck parks 2 doors down. The driver shuts the engine off and starts reading a paper.

One guy gets out with a shovel and digs a hole in the parkway. He then goes back to the truck and a 2nd guy comes out and fills in the hole, and goes back to the truck.

The driver moves the truck one house down, and the same same scene is repeated.

The homeowner walks up to the driver and asks what the blankety blank they are doing. The driver replies, "Hey the guy that plants the trees called in sick today."

So do you still want Chicago to run the power network?????

Anonymous said...

20 to 25% increases on the way, natural gas prices through the roof too. I'm a single parent of three children--my 'ex has disappeared and hasn't ever paid child support. I'm just making it, barely, now without any help from the government but this will tip me over the edge.
If I see one more ComEd commercial with that genial chucklehead explaining how this has to be done, I will hurl.