Look who wants in on ComEd’s rate-setting mojo

By Steve Daniels, Crain’s Chicago Business, Feb. 28, 2020

It’s worked so well for Commonwealth Edison, after all.

Nicor Gas, the utility delivering natural gas to most of suburban Chicago, is pushing legislation in Springfield to put the rate changes for it and Peoples Gas, the utility serving the city, on the same sort of autopilot that ComEd and downstate utility Ameren Illinois have enjoyed for eight years. Bills were introduced in mid-February in the House and Senate.

For its part, Peoples says the bill is Nicor’s idea and that Peoples is still reviewing it. Sources hear that Peoples intends to file with the Illinois Commerce Commission for a rate hike as soon as this month, so that’s presumably more on the minds of the utility and Wisconsin-based parent WEC Energy Group than Nicor’s bid to convince lawmakers to let it set rates via a truncated annual-formula process. Gas utilities currently must use the traditional route, requesting rate hikes at times of their choosing from the ICC and going through an exhaustive 11-month review process.

Naperville-based Nicor, a unit of Atlanta-based Southern, has obtained ICC approval of two rate hikes in the past two years, together adding $261 million in additional revenue from ratepayers. With Peoples not having received a rate increase since 2015, its request is likely to be a whopper whenever it arrives. And it will come at a time when Chicago households are showing increasing difficulty paying their heating bills.

“While we have not finalized our decision, we have been assessing the possibility of filing a regulatory rate review,” spokeswoman Danisha Hall says in an email.

The lack of a traditional rate hike hasn’t stopped Peoples Gas from raising Chicagoans’ cost to heat their homes. A 2013 law gave both Peoples and Nicor the authority to impose surcharges on monthly bills to help recover the cost of speeding up the replacement of aging pipes throughout their service territories.

In 2019, a residential customer consuming the average amount of natural gas in Chicago paid Peoples nearly $107 in such surcharges, nearly 10 percent of the total bill, according to the utility. That was $30 more than the year before.

The surcharge revenues at Peoples were the primary reason that WEC Energy’s Illinois gas utilities (which include smaller North Shore Gas) contributed $291 million in operating earnings last year to the parent, up 14 percent from the year before. That helped support the 7 percent increase WEC announced in its dividend for 2020.

UNCOLLECTIBLES

In the meantime, though, Peoples is setting records of a different type. The utility reported $60 million in uncollectible bills for 2019, with $51 million of that coming from residential heating customers. That’s 54 percent above the 2018 figure of $39 million in bad debt.

While it keeps hiking heating bills to pay for the spike in capital investment, Peoples bears little to no risk from those unable or unwilling to pay. By state law, it recovers the costs from paying customers via yet another special charge.

The outlook for the formula-rate bill that Nicor is pushing is uncertain at best. ComEd has been trying to convince Springfield to extend its formula-rate authority, which expires in 2022, by a decade. That bill is on ice for the time being, with ComEd in the middle of a federal investigation of corruption in state government. Lawmakers aren’t likely to be eager to confer similar power on Nicor and Peoples, especially with concerns expressed by Mayor Lori Lightfoot about home-heating affordability in her city.

Nicor has been spending similar amounts to Peoples on capital projects, but its base of 2.2 million customers is more than double that of Peoples. It also serves a significantly smaller proportion of low-income households. So the costs can be spread across a far larger base and heating bills don’t rise as much.

The average residential customer in the city paid $1,222 for natural gas last year. That includes many dwellers of small homes and condominiums, so average usage is less than that of Nicor’s customers in the suburbs.

“If our proposal is adopted, customers will benefit in three ways,” Nicor spokesman Craig Whyte says in an email. “Lower litigation costs while having the ICC fully consider our rate requests, increased transparency into company investments and expenses through detailed annual filings, and lower costs to customers by the utility reducing its annual return on equity.”

Nicor says the return on equity it’s allowed to earn—a key component in setting utility rates—would be lower by more than 0.8 percentage points than the 9.73 percent the ICC approved in the rate case decided late last year.

Similar to ComEd’s formula rate, Nicor’s bill would tie its return on equity to long-term interest rates. But at today’s historically low rates, the gas utilities would earn more than 1 percentage point more than ComEd. Only at much higher rates, with a 30-year Treasury yield at 5 percent or more, would ComEd’s return exceed that of Peoples and Nicor under the bill.

A key benefit of the formula approach is that utilities are guaranteed they will earn their specified return. If they fall short, rates climb that much more the next year to make them whole. Under the traditional approach, utilities are given no such guarantee.

It’s easy to see why gas utilities want what electric utilities already have. ComEd’s electricity delivery rate for residential customers has increased about 37 percent in the seven years since the formula took hold.

Consumer advocates are backing legislation introduced in the House and Senate that would take away Peoples’ authority to impose the infrastructure surcharge on its customers. That legislation was put forward in the House last year as well and went nowhere, in large part due to the opposition of unions that benefit from the pipe work.

The surcharge authority expires at the end of 2023.

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