Transcript Overview of the Rate Setting Process

Pricing the Components of
Electric Service in Illinois
Scott A. Struck, CPA
Financial Analysis Division
Public Utilities Bureau
Illinois Commerce Commission
The Path to Customer Choice
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Vertically Integrate Monopolies (1913-1997):
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Utilities provided generation, transmission, and distribution services to
the end user.
Bundled prices were set based on traditional cost of service ratemaking.
The Transition (1998-2006)
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Phase in of customer choice.
Restructuring of electric companies.
Transfer or sale of generating plants.
Consolidate through mergers and acquisitions.
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Customer Choice (2007 and Beyond)
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Customers may choose between the incumbent utility
and other electricity suppliers.
Customers still receive distribution service from the
incumbent utility at prices set by the ICC.
Transmission service is provided by a regional operator
at prices set by the FERC.
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What the Customers Can Choose
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Delivery Services Only
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Bundled Services
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Customers obtain electric supply from another provider at market
prices.
The local utility delivers electric power and energy to retail customers.
All components of electric service, including electric supply, are
provided by the local utility.
The utility acquires electricity through a competitive procurement
process.
The utility sells the electricity to bundled services customers at cost,
based on the competitive procurement process.
Pricing for Both is Unbundled
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Pricing Components
Bundled Service
Delivery Only
Customer Charge
Distribution Facilities Charge
Standard Metering Charge
Distribution Service
Transmission Service Charges
Transmission Service
Purchased Electricity Charges
Reconciliation Factor
Electric Supply
Customer Charge
Distribution Facilities Charge
Standard Metering Charge
Transmission Service Charge
Not Applicable
Not Applicable
Pricing Distribution Service
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Based on a revenue requirement derived using the
traditional test year cost of service model.
Challenges that came with restructuring.
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Functionalization – The need to more clearly separating distribution and
transmission.
Common Costs
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Costs are incurred that benefit more than one function.
Common costs must be assigned among the functions in an equitable manner.
Related Party Transactions
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Electric supply is purchased from related entities for resale to customers.
Administrative services companies provide services to the distribution utility as well as
other affiliated companies.
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Separating Distribution Operations from
Transmission Operations
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When electric utilities were vertically integrated, the distinction
between distribution and transmission facilities was based primarily
on voltage level.
Now that distribution and transmission services are provided
separately and priced separately, a more meaningful way of
separating them is needed.
FERC identified seven factors and asked each state to apply them
on a facility by facility basis to separate the distribution and
transmission functions.
When these factors were applied they produced a net shift of plant
from the transmission function to the distribution function.
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The Seven Factors
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Local distributions facilities are normally in close proximity to retail
customers.
Local distribution facilities are primarily radial in character.
Power flows into local distribution systems; it rarely, if ever, flows
out.
When power enters a local distribution system, it is not reconsigned
or transported on to some other market.
Power entering a local distribution system is consumed in a
comparatively restricted geographical area.
Meters are based at the transmission/local distributions interface to
measure flows into the local distribution system.
Local distribution systems will be of reduced voltage.
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Common Costs
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Common costs benefit all the functions rather than just one.
Examples include general and administrative expenses as well as
general and intangible plant.
When electric utilities were vertically integrated, there was no need
to assign common costs among the functions of generation,
transmission, and distribution.
Now that electric supply, transmission, and distribution services are
provided separately and priced separately, common costs must be
assigned among them and included in the prices in an equitable
way.
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Common Costs Issues – An Example
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The utility transferred its generating plants to an affiliated company.
In rate cases subsequent to the transfer, there was concern that the
utility’s Administrative and General Expenses (A&G) had not
declined commensurate with the plant transfer.
The utility failed to show to the Commission’s satisfaction that it had
not retained some of the A&G that still supported the generation
function.
As time has passed, the utility has done a better job of showing that
it’s A&G support only the distribution function.
This issue also arose regarding General and Intangible plant.
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Related Party Transactions and
Relationships
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The utilities no longer own generating plant, but much of the
generating plant is owned by the utilities’ affiliates.
The holding companies that own the utility operating companies
have also formed separate centralized services companies that
provide administrative services to the electric distribution companies
as well as to the related generating companies and other related
companies.
We need to ensure that the rate-regulated operations do not
subsidize the competitive operations.
We need to ensure that the related companies do not pass to the
regulated companies costs beyond what is reasonable.
We need to ensure the regulated utilities do not discriminate in
favor of their related supplies that are in competition with
alternative suppliers.
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Pricing Transmission Service
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Based on a revenue requirement derived using an annual formula
approach.
Challenges that came with restructuring.
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FERC’s assertion of jurisdiction.
The ICC is now an intervenor rather than the regulator.
The rates set by the ICC essentially pass through to customers the
pricing that is set by the FERC.
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Pricing Supply Service
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Customers may choose among alternative suppliers.
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Retail Energy Suppliers
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When a customer chooses a Retail Energy Supplier other than the incumbent
utility, those prices are set by the market.
When a customer chooses the incumbent utility as its supplier, the prices the
utility charges are set by the ICC.
Electricity is sold at a market price based on agreement between the seller and
buyer.
Bundled Service from the Incumbent Utility
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The incumbent utility procures electric supply through a competitive process.
The incumbents utility then resells that electric supply to customers at its cost.
Tariffs are necessary to translate the utility's purchase price and administrative
costs into customer charges for electric supply.
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Competitive Procurement Process
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2007 - Auction
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Multiple round, descending clock auction.
Full requirements – Supplier agrees to supply a set portion of the utility’s full
requirements throughout the term of the agreement, even though the amount of
energy at some times will be greater and more costly than at other times.
Tranche size of 50 MW of each customer segment’s peak demand.
Post 2007 – Illinois Power Authority (IPA)
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The Illinois Legislature established the IPA to procure power and energy through
a competitive solicitation process and to generate its own power and energy.
The IPA submits a procurement plan which the ICC approves if the ICC
determines that the plan “will ensure adequate, reliable, affordable, efficient, and
environmentally sustainable electric service at the lowest total cost over time,
taking into account any benefits of price stability.”
The IPA procures electricity under a competitive RFP process, the results of
which must be approved by the ICC.
Utilities recover cost of electricity procured under this process.
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Purchased Energy Charge Formula
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PECg =
PEP =
EPEg =
OPEP =
EOPCg =
Eg
=
Expg =
Purchased Electricity Charge
Peak Energy Purchased Electricity Price
Expected Peak Energy
Off Peak Energy Purchased Electricity Price
Expected Off Peak Energy
Expected Energy
Expansion Factor
Summary
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Customers Can Choose:
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Purchase electric supply from the incumbent utility under bundled
services.
Purchase electric supply from a retail electric supplier and take only
delivery services from the incumbent utility.
All Prices are Unbundled.
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Services are priced the same for all customers who take those services.
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