STATE OF ILLINOIS ILLINOIS COMMERCE COMMISSION COMMONWEALTH EDISON COMPANY : : Petition for approval of delivery services tariffs and : tariff revisions and of residential delivery services : No. 01-0423 implementation plan, and for approval of certain : other amendments and additions to its rates, terms, : and conditions. : INITIAL BRIEF OF COMMONWEALTH EDISON COMPANY Paul F. Hanzlik Anastasia M. O’Brien E. Glenn Rippie Associate General Counsel John L. Rogers Richard M. Bernet John P. Ratnaswamy Assistant General Counsel FOLEY & LARDNER EXELON BUSINESS SERVICES COMPANY Three First National Plaza 10 S. Dearborn St. Suite 4100 Suite 3500 Chicago, Illinois 60602 Chicago, Illinois 60603 (312) 558-6600 (312) 395-5400 Counsel for Commonwealth Edison Company Dated: December 10, 2001 011.469538.5 TABLE OF CONTENTS Page INTRODUCTION .......................................................................................................................... 1 EXECUTIVE SUMMARY OF THE ARGUMENT...................................................................... 5 ARGUMENT................................................................................................................................ 25 I. Legal Issues and Standards for Decision........................................................................... 25 A. Substantive Standards and Policies Governing Requested Rates ......................... 25 B. Procedural Issues (e.g., Admissibility) Not Addressed in Specific Arguments............................................................................................................. 28 C. Other Policy Issues (Note: each party may address policy issues in any order)..................................................................................................................... 29 1. Impact on Customers................................................................................. 29 2. Impact on Cost Based Rates...................................................................... 35 3. Impact on the Development of an Effectively Competitive and Efficient Electricity Market....................................................................... 38 4. Impact on Future Rate Cases..................................................................... 39 II. Revenue Requirement Issues ............................................................................................ 41 A. Calculation of Revenue Requirement ................................................................... 41 B. Selection of Test Year........................................................................................... 41 C. Rate Base............................................................................................................... 42 1. Functionalization of Distribution Plant..................................................... 42 2. General and Intangible Plant -- Direct Assignment and Allocation......... 43 3. Known & Measurable Changes to Test Year Plant Balances................... 45 4. Other Adjustments to Rate Base (Non-Plant)........................................... 47 a. Budget Payment Plan Balances..................................................... 47 b. Accumulated Deferred Income Taxes........................................... 47 i TABLE OF CONTENTS (cont’d) Page 5. Plant Adjustments ..................................................................................... 47 a. Plant Expenditures for Q2 2001.................................................... 47 b. Proposed Retired Plant.................................................................. 47 c. Retirements Related to 2001 Replacement Plant .......................... 48 d. Accumulated Depreciation Adjustment Related to Overtime and Alleged Premiums Paid......................................... 48 e. Accumulated Deferred Taxes Adjustment Related to Overtime and Alleged Premiums Paid......................................... 49 6. Prudence of Distribution Capital Investment Costs.................................. 49 a. Effect of Alleged Imprudence on Rates........................................ 51 b. Prudence of Specific Distribution Capital Investments in Rate Base....................................................................................... 53 c. Request for Audit of New Distribution Capital Investment Costs.............................................................................................. 60 7. Other Rate Base Issues.............................................................................. 61 D. Operating Revenues and Expenses ....................................................................... 62 1. Recommended Operating Income Statement............................................ 62 2. Operating Revenues .................................................................................. 62 3. Operating Expenses................................................................................... 62 a. Functionalization of Generation, Transmission, and Distribution Expenses ................................................................... 63 b. A&G Expenses -- Direct Assignment and Allocation.................. 64 c. Proposed Known and Measurable Changes to Test Year Expenses........................................................................................ 65 (i) Expense Adjustments Related To Rate Base Adjustments....................................................................... 65 (ii) “Levelization” Adjustments.............................................. 66 ii TABLE OF CONTENTS (cont’d) Page (iii) Salary and Wage Adjustment for General Pay Increases............................................................................ 71 (iv) Adjustments for Post-Test Year “Merger Savings”.......... 71 d. Other Proposed Adjustments to Expenses .................................... 73 (i) Exclusion of Incremental Expenses Related to Unicom/PECO Merger...................................................... 74 (ii) Exclusion of Audit-Related Costs..................................... 74 (iii) Environmental Remediation Expenses.............................. 74 (iv) Advertising Costs.............................................................. 75 (v) Bank Commitment Fees.................................................... 77 (vi) Legal Expenses.................................................................. 78 (vii) Charitable Contributions & Memberships ........................ 81 (viii) Special Projects................................................................. 82 (ix) Research and Development Costs..................................... 84 (x) Interest On Customer Deposits ......................................... 85 (xi) Uncollectibles Expense..................................................... 86 (xii) Taxes Other Than Income Taxes ...................................... 87 (xiii) Incentive Compensation.................................................... 88 (xiv) Rate Case Expenses........................................................... 89 4. Prudence of Expenses................................................................................ 90 5. Other Revenue and Expense Issues........................................................... 92 E. Cost of Capital....................................................................................................... 95 1. Capital Structure........................................................................................ 95 2. Cost of Debt.............................................................................................. 97 3. Cost of Preferred Stock............................................................................. 98 iii TABLE OF CONTENTS (cont’d) Page 4. Cost of Common Equity............................................................................ 98 5. Overall Rate of Return............................................................................ 101 F. Cost of Service and Rate Design......................................................................... 103 1. Cost of Service Study Issues................................................................... 103 a. Marginal Cost Study.................................................................... 106 b. Embedded Cost Study................................................................. 107 2. Interclass Revenue Allocation................................................................. 108 G. Rate Design......................................................................................................... 109 1. RCDS Rate Design.................................................................................. 109 a. Demand Ratchet.......................................................................... 109 (i) General Service Ratchet.................................................. 109 (ii) Special Ratchet for Standby Customers.......................... 110 b. Definition of Billing Demand in Rate RCDS ............................. 111 c. Impact on CTCs.......................................................................... 111 d. Generation Facilities Under Rate RCDS..................................... 112 (i) Proposals for Production Credit...................................... 112 (ii) Proposals for Production Adder...................................... 112 2. Rider HVDS ............................................................................................ 116 a. Eligibility..................................................................................... 117