Cook County State's Attorney's Office

ILLINOIS COMMERCE COMMISSION

The People of the State of Illinois, : Cook County State's Attorney's Office, : American Association of Retired Persons, : Citizen Action/Illinois, Citizens Utility Board,: Environmental Law and Policy Center : and Illinois State Public Interest : 03-0673 Research Group, Inc : : Petition for an Investigation into the : Condition of Illinois Power Company. :

POST EXCEPTIONS PROPOSED ORDER

Introduction

This matter comes before the Illinois Commerce Commission (“Commission”) on the Petition of the above captioned parties requesting that the Commission initiate an investigation into the financial condition of Illinois Power Company (“IP”) pursuant to Sections 4-101 and 8-102 of the Public Utilities Act (“Act”). The Petitioners are the People of the State of Illinois, the Cook County State’s Attorney (“CCSA”), American Association of Retired Persons, Citizen Action/ Illinois, Citizens Utility Board, Environmental Law and Policy Center, and the Illinois State Public Interest Research Group, Inc. Commission Staff, IP, Commonwealth Edison (“ComEd”) and the cities of Champaign and Urbana, Illinois also filed appearances and/or petitions to intervene in the case.

Pursuant to notice given in accordance with the law and the rules and regulations of the Commission, this matter came on for a status hearing before a duly authorized Administrative Law Judge of the Commission at its offices in Chicago, Illinois on November 14, 2003. At that time, a briefing schedule was set to apprise the Commission of the parties’ views on the necessity for and proposed scope of the investigation.

The predicate for the Petition was the proposed purchase of IP from its parent corporation, Dynegy, Inc, (“Dynegy”) by Exelon Energy Delivery, LLC, (“EED”) a subsidiary of Exelon Corporation (“Exelon”). At the time the petition was filed on November 3, 2003, legislation proposed by Exelon was pending that called for shortening the Commission’s merger review procedures and, in Exelon’s view, facilitating its subsidiary’s purchase plans. The Petition also expressed concern about a proposed residential electric rate increase for the years 2007 to and including 2010, 03-0673 which was tied to the merger proposal legislation. The Petition requested that the Commission investigate the financial condition and management of IP for the benefit of the Illinois General Assembly (“General Assembly”) in its deliberations on the proposed law changes. The General Assembly did not request that the Commission undertake an investigation of IP.

The proposed law changes were not enacted in the 2003 Fall Veto Session. Subsequently, EED withdrew its offer to purchase IP. On November 25, 2003, ComEd, also a subsidiary of Exelon, withdrew its petition to intervene in this Docket. On December 6, 2003, it was announced that Ameren Corporation (“Ameren”) had begun negotiating with Dynegy for the purchase of IP. On December 15, 2003, County moved to withdraw from the proceeding.

Pursuant to Section 8-102 of the Act, the issues before the Commission are: 1) whether to initiate an investigation; and, 2) if initiated, its scope.

The Petition

The Petition contends that IP’s financial condition and its ability to provide safe and reliable service is far from clear. Petitioners urge that an investigation, including an audit, would determine whether IP can provide safe and reliable service to its customers. The petition requests that the Commission examine the books and records of IP and issue a report stating IP’s ability to maintain safe and reliable service. The Petition incorrectly argued that an investigation is necessary because as a subsidiary company, IP does not publicly disclose its internal finances. In fact, IP does publicly disclose its financial statements.

IP’s Position

IP requests that the Petition be denied. IP notes that because of the failure of the proposed legislation and the collapse of the proposed EED purchase, the stated reasons for the requested investigation have become moot. IP also notes that the Petition also relies on the incorrect premise that IP’s financial condition is unknown. In fact, IP’s financial statements are a matter of public record. IP also files detailed financial information with the Commission and with the Federal Energy Regulatory Commission on an annual basis. All of this information is already available to the General Assembly.

Staff’s View

Staff also recommends that the Petition be denied. Staff asserts that it has been closely monitoring IP’s financial condition since the summer of 2002. This monitoring has resulted in enhancements of IP’s financial viability. In Docket 02-0561, the Commission approved a “Netting Agreement” between IP and Dynegy under which IP would offset amounts owed to Dynegy by unpaid amounts owed to IP. On Staff’s

2 03-0673 recommendation, the Commission has also approved the suspension of dividend payments by IP to Dynegy in the same proceeding.

Staff has also monitored IP’s financial statements, credit ratings reports, news releases and Dynegy earnings calls. Staff’s discussion of IP’s finances in its response to the Petition demonstrates it has been actively monitoring IP’s finances for over a year. Staff has determined that IP’s shortterm financial condition is adequate. Its intermediate and long-term finances are more problematic.

Staff disputes the need for a management audit of IP. IP, pursuant to Section 16-125 of the Act, has been filing an annual electric reliability report since 1998. Staff’s assessment of these reports includes an evaluation of IP’s ability to provide reliable service. Staff has concluded that IP provides electric service comparable to that provided by other Illinois utilities. Staff has also taken action to induce IP to correct known problems on the electric side and it has identified issues regarding gas cost, safety and reliability issues. Staff has advised the Commission regarding the gas cost issue in Docket 01-0701. In other words Staff has already made a determination regarding the strengths and weaknesses of IP management and has made recommendations to the Commission where appropriate. An investigation of these issues would be redundant.

Staff notes that Urbana and Champaign, Illinois have filed informal complaints with the Commission alleging residential service issues. IP has developed a remedial action plan to address these concerns and is working to implement the plan.

Staff also states that if, as a result of the collapse of the EED acquisition, IP substantially reduces its utility operational personnel, Staff may reevaluate its position on the need for an investigation.

Petitioners’ Response

Petitioner’s response argues that comments by Dynegy about potential IP staff reductions and Staff’s concerns about IP and its financial condition provide grounds for an investigation.

Petitioners restate Staff’s concerns about IP’s financial situation and its concerns about IP’s ability to provide safe and reliable gas storage operations. Petitioners point out that Champaign and Urbana have filed an informal complaint with the Commission concerning service issues. They also note that a November 29, 2003, IP equipment failure led to a water treatment plant failure and a “boil order” for eleven Illinois cities.

Petitioners contend that Staff’s response addresses the relationship between IP’s finances and its service obligations. The Commission is currently reviewing the IP gas storage issue in Docket 01-0701. Service issues are being considered in the Champaign/Urbana informal complaint. Petitioners suggest that a single new docket consolidating these concerns could provide a global review of all outstanding IP issues.

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Petitioners argue that although the Exelon/IP deal is dead, the service and reliability issues raised by the petition are not moot. The Petitioners also urge the Commission to keep this Docket open indefinitely in order to be able to address future concerns about IP.

Champaign’s and Urbana’s Response

Champaign and Urbana filed identical responses to the Petition on December 15 and 17, 2003 respectively. They asserts that IP’s response to its informal complaint (“IC Response”) has been inadequate. They fault the IC Response for failing to set forth quantifiable customer service standards, not addressing types of reliability concerns that are common problems, and failing to provide a mechanism for compelling compliance with customer service standards or proactive programs for inspection, testing and infrastructure investment.

Urbana and Champaign argue state that the recent boil order incident underscores the seriousness of the situation and the inadequacy of the IC Response. They urge the Commission to open an investigation regarding IP’s management and finances.

IP Reply to Petitioners’ Response

IP notes that the Petitioner’s response raises three new issues that are tangentially related to the Petition’s initial focus. These new issues are: 1) management and safety concerns in the operation of gas storage fields voiced by Staff in Docket 01- 0701 (the 2001 IP “PGA” docket); 2) the informal complaint brought by Champagne and Urbana regarding service quality and related issues; and 3) the November 28, 2003 service interruption to a water treatment plant that led to a “boil order” for communities served by the plant.

IP points out that the gas storage case issues have already been the subject of a contested evidentiary proceeding in which a proposed order has not as yet issued. IP contends that there is no reason to re-examine these issues prior to a determination by the Commission in the pending docket.

IP similarly argues that the service issues giving rise to the Champagne/Urbana informal complaint are already being addressed through normal Commission procedures. In IP’s view, they do not justify a wide-ranging investigation of its financial condition. If the issues are not resolved, a formal complaint from the same parties would be a more appropriate venue.

In regard to the recent water company service outage, IP notes that the water company’s backup power generator failed after 15 minutes of use. Although, the initial outage of IP service was regrettable, the water company is partly culpable because its backup system failed. No utility provides 100% reliable service. It is incumbent upon

4 03-0673 the water utility to provide some electric power redundancy so that water service can be continued during power outages. The “boil order” was not directly caused by IP’s outage. Moreover, one service outage does not indicate a systemic failure requiring a large-scale investigation.

IP contends that Petitioner’s initial arguments are moot. There is no pending legislation to evaluate. Staff keeps a close eye on IP’s finances. Petitioner’s new arguments do not provide adequate reasons for opening a new wide ranging and partially duplicative investigation.

Commission Analysis and Conclusion

The primary impetus for this Petition was the then pending asset purchase between EED and IP as well as proposed legislation that would have shortened the relevant Commission review period and tied the merger to a residential rate increase. The legislation was not enacted. The proposed acquisition of IP by EED has been cancelled.

Notwithstanding this turn of events, Petitioners urge us to open an investigation because of: 1) gas storage issues that are already under review by the Commission in another Docket; 2) service quality issues in the Champagne/Urbana area which are the subject of a pending informal complaint; and 3) a recent service outage that resulted in a failure of water service to eleven communities including Champagne and Urbana.

We find that the original issues underlying the petition have, by reason of subsequent events, become moot. Moreover, Staff has, on its own initiative, been working with and monitoring IP finances and operations for more than a year. We find that the additional justifications for an investigation recently urged by Petitioners are either already being addressed in other Commission proceedings or are insufficiently related to IP’s financial condition and overall operating ability to justify an additional investigation at this time. Champagne and Urbana should pursue their complaint on the formal level if their concerns have not been adequately addressed in the informal proceeding. We decline Petitioner’s suggestion that we order this Docket to remain open indefinitely for a potential future investigation of unknown scope and duration.

Having considered the record in this proceeding, including Staff’s Response to the Petition, the Commission has determined that the Petition should be not granted and that a formal investigation of IP’s financial condition and operations is not appropriate at this time. We direct Staff to continue its oversight of IP and to advise the Commission should such an investigation become prudent or necessary.

Findings and Ordering Paragraph

The Commission, having reviewed the record in this proceeding and being fully advised in the premises, finds as follows:

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(1) that it has jurisdiction over the subject matter of this proceeding and the Respondent Illinois Power Company;

(2) the Petition is denied for the reasons stated herein;

(3) Staff is directed to continue its oversight of IP and to take appropriate action to insure its safe and efficient operation.

(4) the Cook County State’s Attorney’s Motion to Withdraw and the Motions of the cities of Champaign and Urbana to Intervene are hereby granted.

IT IS THEREFORE ORDERED by the Illinois Commerce Commission that the Petition is denied

IT IS FURTHER ORDERED that subject to Section 10-113 of the Public Utilities Act and 83 Ill. Adm. Code 200.880, this order is final; it is not subject to the Administrative Review Law.

By order of the Commission this 4th day of February, 2004.

(SIGNED) EDWARD C. HURLEY

Chairman