Guaranteed Profits, Broken Promises How Comed and Exelon Turned Utility Regulation on Its Head Guaranteed Profits, Broken Promises

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Guaranteed Profits, Broken Promises How Comed and Exelon Turned Utility Regulation on Its Head Guaranteed Profits, Broken Promises Guaranteed Profits, Broken Promises How ComEd and Exelon turned utility regulation on its head Guaranteed Profits, Broken Promises How ComEd and Exelon turned utility regulation on its head WRITTEN BY: ABRAHAM SCARR, ILLINOIS PIRG JEFF ORCUTT, CHAPMAN ENERGY STRATEGIES DECEMBER 2020 ACKNOWLEDGMENTS Illinois PIRG thanks Elizabeth Ridlington, Tony Dutzik and Bryn Huxley-Reicher of Frontier Group for editorial support. Thanks to Energy Action Fund for supporting this report. The authors bear responsibility for any factual errors. The recommendations are those of Illinois PIRG. The views expressed in this report are those of the authors and do not necessarily reflect the views of our funders or those who provided review. 2020 Illinois PIRG. Some rights reserved. This work is licensed under a Creative Commons Attribution Non-Commercial No Derivatives 3.0 Unported License. To view the terms of this license, visit creativecommons.org/licenses/by-nc-nd/3.0.” Illinois PIRG is an advocate for the public interest. We speak out for a healthier, safer world in which we’re freer to pursue our own individual well-being and the common good. For more information, please visit illinoispirg.org. Helping regulators, companies, advocates, and customers navigate and facilitate the growing energy revolution, Chapman Energy Strategies LLC contributes regulatory and policy insights to achieve better long-term outcomes for the public interest. Chapman Energy Strategies’ expertise delivers on a broad range of deliverables from the execution of business and regulatory strategy; thought leadership from regulatory manuals to workshop comments; support for advocacy campaigns; to more traditional project management. For more information please email [email protected]. Layout: To the Point Collaborative, tothepointcollaborative.com Cover: Wall Power Substation, Chicago. Credit: Terence Faircloth Contents EXECUTIVE SUMMARY .......................................................................................................................4 CHAPTER 1: CONTEXT AND HISTORY ............................................................................................10 1.1 ComEd, Exelon and conflicts of interest ....................................................................................................11 1.2 ComEd was in crisis over the decade leading up to EIMA .......................................................................16 1.3 The smart grid and its potential benefits ..................................................................................................20 1.4 Traditional utility regulation and the role of regulators ............................................................................24 1.5 The Energy Infrastructure Modernization Act ...........................................................................................28 CHAPTER 2: EIMA CREATED A PROFIT MACHINE, BENEFITING COMED WELL AND ABOVE WHAT WAS “NECESSARY” ...............................................................................34 2.1 EIMA is a profit machine for ComEd and Exelon ......................................................................................35 2.2 EIMA delivered revenue and profits to ComEd far beyond what was “necessary” to fund infrastructure upgrades .................................................................................................................43 CHAPTER 3: EIMA BENEFITED COMED BEYOND THE IMMEDIATE AND DIRECT FINANCIAL BENEFITS .......................................................................................................................49 3.1 EIMA’s profit machine has been vital to Exelon ..........................................................................................49 3.2 EIMA turned the Commission into a rubber stamp, shielding ComEd and its profits from accountability ....................................................................................................................54 CHAPTER 4: COMED PROMISED CUSTOMER BENEFITS FROM SMART METERS, WHILE AVOIDING RESPONSIBILITY FOR ENSURING THEM .........................................................58 4.1 ComEd promised customers would enjoy smart meter benefits beyond cost savings from utility operational benefits ...........................................................................................66 4.2 ComEd carefully and effectively avoided responsibility for delivering the customer benefits it promised .............................................................................................................69 CHAPTER 5: EIMA’S BENEFITS ARE LARGELY UNKNOWN OR UNREALIZED ............................67 5.1 ComEd’s claim that the value of reliability and operational benefits are worth its massive investment is based on few metrics and insufficient analysis ...........................................69 5.2 ComEd caused beneficial customer applications to be delayed, not enabled, or drastically underutilized ..........................................................................................................................72 5.3 By withholding important customer and public benefits, ComEd was able to leverage them again in subsequent legislation that won ComEd and Exelon further windfalls ...............................79 RECOMMENDATIONS ........................................................................................................................82 ENDNOTES .........................................................................................................................................86 Executive summary COMMONWEALTH EDISON (COMED), Illinois’ In the wake of the scandal, ComEd has largest electric utility, first proposed a large insisted that the “improper conduct capital program to modernize its grid in described in the deferred prosecution 2007.1 Understanding the substantial costs agreement … does not mean that consum- and potential, if uncertain, benefits of so- ers were harmed by the legislation that called “smart grid” investments, state regu- was passed in Illinois.”7 lators opted to instead launch an innovative Nine years after EIMA’s passage, the record statewide process, seeking to ensure “‘that is clear: EIMA delivered guaranteed, record consumers are the primary beneficiaries’ of profits and other benefits to ComEd and its the smart grid modernization.”2 parent company, Exelon Corporation, while Before this customer-focused process leaving ComEd customers and the public addressed policymaking details,3 ComEd with broken promises. went to the Illinois General Assembly This report examines EIMA; the claims to pass the Energy Infrastructure Mod- ComEd made to pass it and makes to ernization Act (EIMA) in 2011, which defend it; its impact on ComEd and Exelon; paired capital investments with radical, on its regulator, the Illinois Commerce utility-friendly changes to rate-setting 4 Commission; and on ComEd customers and and customer protections. ComEd sold the public interest. EIMA as necessary to move from a grid whose technology had not changed In the language of ComEd,8 EIMA imposed much in the past 100 years and that “obligations’’ on the utility: $2.6 billion in functioned mainly to dispatch power specified reliability and smart grid invest- from centralized power plants to custom- ments.9 In return, EIMA gave the company ers, to a modern smart grid capable of generous “assurances:” faster and more integrating power from smaller, clean certain, i.e. guaranteed, revenue and profit energy sources, improving efficiency, and with less regulatory oversight through so- empowering customers with more infor- called “formula” rate-setting.10 mation and control.5 ComEd presented these obligations and We now know that EIMA was passed, in assurances as a tightly bound, balanced part, through a corrupt and illegal bribery give and take; the company said it “simply scheme. In a July deferred prosecution can’t make investment without the stability agreement with the United States Attor- and predictability embodied in the regula- ney for the Northern District of Illinois, tory reform section of the bill.”11 But the two ComEd admitted to perpetrating this have little to do with one another. EIMA scheme in an attempt to influence Illinois and its formula built ComEd and Exelon a House Speaker Michael Madigan and win profit machine entirely out of proportion 6 favorable legislation, starting with EIMA. to the law’s specified investments. PAGE 4 ComEd CEO Joe Dominguez defends EIMA. Credit: Screengrab via WGN9 Formula rate setting provided such an Its formula flattens billions of dollars of advantage over the traditional process that investment to formula “inputs” taken from ComEd easily handled its specified invest- one high-level federal form.17 Not only has ments, deploying smart meters at almost this kept the Commission from reviewing twice the speed as planned,12 while also all of ComEd’s massive spending but it has increasing profits.13 This alone demonstrates reduced the Commission to a rubber stamp. that EIMA’s assurances were overkill. Compared to the more than $5 billion added to ComEd’s rate base through annual But further, formula ratemaking allowed formula rate updates, the Commission has ComEd to add significantly more profits disallowed only $23 million.18 While ComEd than planned in EIMA; while the specified spends unprecedented billions, customers investments are all but completed, ComEd bear all the risks that the company wastes continues to enjoy formula rates and is plan-
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