© 2024 NPR Illinois
The Capital's Community & News Service
Play Live Radio
Next Up:
0:00
0:00
0:00 0:00
Available On Air Stations
Illinois Issues
Archive2001-Present: Scroll Down or Use Search1975-2001: Click Here

Switched On: Fledgling IL Power Agency Bought Electricity on Behalf of Utilities

Utilities don’t profit from the cost of energy. They simply pass that cost on to their customers, which accounts for about two-thirds of their overall bills. Utilities make their profits from a charge to deliver that power.
WUIS/Illinois Issues

The ease of flipping a switch on a kitchen wall masks the complicated process that flows electricity to homes and businesses.

Electricity customers can be blissfully unaware that the process underwent a regulatory facelift of sorts over the past two years. Commonwealth Edison, which serves the northern part of the state, and Ameren Illinois, which serves the central and southern regions, no longer procure their own power loads.

The Illinois Power Agency does it for them.

The one-year-old agency has one employee, Mark Pruitt, who coordinates the procurement process. He’s supposed to have a small staff, but state budget woes wiped out his ability to hire employees by the time he carried out the agency’s inaugural venture this spring.

Nevertheless, the Illinois Power Agency managed to take advantage of cheaper wholesale prices, thanks, in part, to reduced demand during the national recession. Starting in June, typical ComEd customers could save about $94 on their bills this year. Average Ameren Illinois customers who use about 10,000 kilowatt hours could save about $100, although the utility is seeking state approval to raise delivery rates.

Reasons for the lower costs vary and depend on the source, but all agree that the process is more transparent and reassuring to consumers. Numerous questions going forward include how the IPA will fit within the national picture as states try to figure out new ways to re-regulate the power industry while still allowing market competition to spur innovation. 

Uncertainty within the marketplace is matched by uncertainty within Illinois state government.

Pruitt did not know in mid-June whether he would remain with the agency beyond this summer because Gov. Pat Quinn is under legislative pressure to re-evaluate high-level appointees of the two previous governors, George Ryan and Rod Blagojevich. Both have been targets of federal corruption probes. Pruitt was a Blagojevich appointee and says he “serves at the pleasure.” Quinn could opt to reappoint him but has not indicated whether he would do so.

In any case, Pruitt is responsible for analyzing each scenario, per state law, to provide sustainable, reliable, low-cost electricity with consideration for stability over time. 

“The IPA, from a procurement perspective, is not here to go find cheap electricity,” he told a House committee in late May. “There is no cheap electricity. We buy electricity from a market. Prices in that market change over time.”

Instead, state law mandates that the agency, with cooperation of the utilities, procure energy as close to market prices as possible.

The new process was born out of necessity, says Susan Hedman, senior policy adviser to Attorney General Lisa Madigan. As part of the effort to regulate electric rates in 1997, the state sold off its power generating plants and tried to spark competition at the retail level. It didn’t work, says Hedman. So the state had to come up with a new system that fostered competition but did not invite collusion between the power generators and their affiliated utilities.

“Illinois is a very unique kind of environment because we haven’t done regulation very well. We didn’t do deregulation very well. Now what we’re trying to do is create a model that actually works to the benefit of consumers.” 

There was an inherent perception problem in the 2006 power auction because utilities were conducting a process to buy electricity from their own affiliates that generate power. According to the attorney general’s complaint filed with the Federal Energy Regulatory Commission, ComEd’s parent company, Exelon Generation, won 97 percent of ComEd’s contracts over 41 months.

“Unless or until ComEd and Ameren no longer have the same set of stockholders as do Exelon Generation and Ameren Generation, that’s a problem,”?Hedman said to the committee. “And that’s why we need the Illinois Power Agency. We can then say with certainty that there is not a problem with the linkage there.”

Madigan’s office was part of the driving force behind the 2007 changes, as was House Speaker Michael Madigan, the attorney general’s father. They led the General Assembly in approving a new law to restructure the process and create the Illinois Power Agency. 

The agency would purchase electricity on behalf of utility customers, taking procurement activity out of the hands of utilities and assigning it to an impartial entity, Hedman says. “It’s a completely different process. The public can feel confident that it is an objective process.”

Utilities don’t profit from the cost of energy. They simply pass that cost on to their customers, which accounts for about two-thirds of their overall bills. Utilities make their profits from a charge to deliver that power. Delivery charges, which are regulated by the Illinois Commerce Commission, make up the remaining one-third of utility bills.

In early 2007, electric bills skyrocketed after a 10-year rate freeze expired along with a state deregulation law. The new system to procure power came in the form of an auction. 

Results angered customers and pressured state lawmakers, as winning bids came in about 21 percent higher than wholesale market prices for ComEd customers and 13 percent higher for Ameren customers. Residents who lived in housing units powered solely by electricity anecdotally saw their bills increase by as much as 300 percent (see Illinois Issues, June 2007, page 20).

George Gross, professor of electrical and computer engineering at the University of Illinois with an appointment in the Institute of Government and Public Affairs, says the auction resulted in “artificial” contracts that were unfavorable to consumers. He helped write a 2008 analysis published in The Electricity Journal that says utilities had to enter into bulk contracts at fixed prices, shifting all uncertainty — and risk — from utilities to the power generating companies. That resulted in higher-than-market prices to cover the risk of not knowing the total load that would be needed.

Gross likens the 2006 auction to running a bus company that would have to run a certain number of buses without knowing the number of riders or how many buses would be needed to accommodate them. “If I buy 250 [buses], who will pay for extra buses that I’m not going to be using?”

He says the new process now con-ducted by the Illinois Power Agency addressed the major criticisms of the 2006 auction and is much more aligned with the way power is generated. The risk of uncertainty has shifted back to the utilities, he adds.

The Illinois Commerce Commission conducted the first procurement event in 2008, while the Illinois Power Agency was being formed. 

This year marked the agency’s debut procurement event. For Ameren Illinois customers, the bidding process resulted in a 13.6 percent reduction in wholesale prices (the supply component of customers’ bills), which translates into about an 8 percent decrease to their overall bills.

ComEd’s 12.5 percent reduction in wholesale power cost translates to about a 9 percent decrease to its customers’ bills.

The five purchasing events this spring procured up to 30 percent of the utilities’ overall supply. The staggered procurement process contributes to stability and reduces the potential for rate shock in the future, says Jim Blessing, manager of power supply acquisition and strategic initiatives for Ameren.

Consumers’ bills decreased for various reasons. In addition to a sharp decline in wholesale market rates, Hedman says one of the major reforms in the 2007 law was to require benchmarks for prices. They allow the Illinois Power Agency to screen out prices that are far above market rates and select the lowest bidders. The auction process of 2006, she says, did not use benchmarks to filter out high bidders.

Utilities support the new process.

William McNeil, vice president of energy acquisition for ComEd, describes it as a “reasonable way” to procure power through a competitive bidding process and anticipates “small tweaks” for the 2010 procurement event.

He says it’s important to note that utilities bought different products in the 2006 auction than in the 2009 process, and he agrees to disagree with consumer advocates that the 2006 auction didn’t track market prices.

But both ComEd and Ameren officials agree that the 2009 process is more transparent. Rather than buying 100 percent of everything needed in a single package, the new process allows the IPA to buy blocks of energy for utilities that can be easily compared to prices in the New York Mercantile Exchange, a trading forum for energy and metals.

“The competitive bidding process ensures that, regardless,” says Craig Nelson, vice president with Ameren Illinois. “But having the added feature of standard products with a visible market price is double assurance that we’re buying things at market price. So, yes, it’s working very well.”

Tim Anderson, executive director of the Illinois Commerce Commission, said during the May committee hearing that the process includes checks and balances by hiring an independent monitor. Boston Pacific is a consulting firm in Washington, D.C., that specializes in the electricity and natural gas business.

“They review everything as it’s happening, so there’s a lot of eyes throughout the whole process,” Anderson said.

But Rep. Dave Winters, a Republican on the committee, asked Pruitt how the IPA could procure energy more efficiently than if the utilities did it themselves.

“I think that’s a fair question, and I’ve wrestled with it myself a number of times,” Pruitt said. 

The nearly 60-step process might not be the sole reason for lower electric bills this year, he added, but “the value that’s brought by the Illinois Power Agency is that there is a governance mandate to the IPA to manage the process to the benefit of consumers. That’s my No. 1 priority. It’s not for developers. It’s not for the utilities.”

According to Gross, the risk is shifting in the right direction, back toward the utilities, but he doesn’t know whether it has gone far enough. 

“Only time will tell,” he says, “because we’re also still in an era of relatively rapid changes.”

The demand for power and the market will continue to morph as manufacturing plants close and as fuel-efficient vehicles become more available. Energy prices also could spike if the federal government further regulates the release of carbon pollutants. 

As the Illinois Power Agency’s port-folio manager, Pruitt has to account for such risks, which he defines as anything that’s unexpected, either positive or negative. And every risk carries a cost.

Part of the strategy to protect consumers includes diversifying the state’s energy mix, just as investors diversify their investment portfolios.

One idea, which invites opposing viewpoints, is to enter into longer-term contracts, potentially as long as 20 years. The idea is to build in some certainty for producers and for the buyers, says Gross. The state’s portfolio, then, could be less subject to frequent changes that could occur in a short amount of time.

The ongoing risk for the IPA, however, is that consumers could leave the utilities and opt to receive power from alternative retail suppliers. When large companies leave the utilities’ customer base, the cost of long-term contracts would have to be spread among a smaller group of customers who remain.

That debate could fuel the possibility of state government eventually owning a power-generating plant, Pruitt says.

Speaker Madigan introduced a resolution this spring that would require the IPA?to report about the feasibility of reintegrating power generators into the regulatory mix. That’s akin to the former model of regulation: expanding the rate base in hopes of protecting consumers from market volatility.

The 2007 state law allows the Illinois Power Agency to own such a plant, provided the first one uses Illinois coal with environmentally friendly technology to reduce pollution. 

Lawmakers already approved an exploration of a plant near Taylorville in Christian County. It would be owned by Nebraska-based Tenaska Inc. (See Illinois Issues, June 2008, page 6.)

A state-owned power plant is a long way off, but Gross says electricity is too important to be left unregulated. “The hand of government is always going to be there.”

Ultimately, the Illinois Power Agency always will be in a state of transition, constantly educating investors about the regulatory environment and educating customers, who would rather flip the switch and not question how the lights come on.

 

Statehouse Bureau Chief Bethany Jaeger

Bethany Jaeger
Credit WUIS/Illinois Issues
/
WUIS/Illinois Issues
Bethany Jaeger

Bethany Jaeger is Statehouse bureau chief of Illinois Issues magazine. She is responsible for reporting and writing news and analysis on state government and politics. She edits the People section of the magazine. She's news editor of the Web Site and writes the magazine's Statehouse Blog. She has been a health reporter for The Herald & Review in Decatur and was managing editor of The Chronicle of Hoopeston. She has a bachelor's degree in journalism from the University of Illinois at Urbana-Champaign and a master's degree in public affairs reporting at the University of Illinois at Springfield. She joined the staff January 2006.

Illinois Issues, July/August, 2009

Related Stories