Despite Below-Average ROEs, Illinois Utilities Increase Earnings with Formula Rate Plan

In mid-April, Commonwealth Edison (ComEd) and Ameren Illinois (AI) filed their sixth annual formula rate updates in accordance with the Illinois Energy Infrastructure Modernization Act (EIMA). Since their inception, Illinois’ formula rates have resulted in declining authorized returns on equity (ROEs) for the state’s investor-owned utilities. Yet utility earnings have increased as investments in authorized rate base projects have grown.

Key Details

  • Passed in 2011, the EIMA established a performance-based formula rate plan that holds utilities accountable for achieving a broad range of targets while allowing them to recover prudent investments in transmission and distribution systems during the period 2012 through 2021
  • If ComEd and AI meet the annual performance targets and achieve performance improvements over certain baseline values, like System Average Interruption Frequency Index, the annual authorized ROE for the utility would be calculated by adding 580 basis points to the 12-month-average 30-year treasury bond yield
  • Consequently, as bond yields have declined by approximately 39% since 2011, both utilities’ authorized ROEs have declined proportionately by approximately 17%. According to recent filings, the authorized ROE for ComEd and AI was 8.64%, which is 50 basis points below the prior year ROE and 121 basis points below the average ROE authorized for electric utilities nationwide during 2015
  • However, over the same period, ComEd’s and AI’s authorized rate bases have increased by 34% and 24%, respectively, due to increased system investments
  • The combination of declining ROEs and increasing rate bases has resulted in an increase in authorized earnings of approximately 16% for ComEd and 6% for AI since 2012

Implications

  • Despite declining authorized ROEs, both ComEd and AI have been able to increase authorized earnings with a ratemaking model designed to reduce regulatory lag and increase utilities’ certainty of recovering costs
  • This model is unusually susceptible to external economic factors, like interest rates, that are beyond the direct control of the utilities or regulators

More Information

SNL Financial: Lower capacity prices to offset ComEd’s requested rate increase for grid costs

SNL RRA: Formulaic ROE calculation produces ROE nearly 100 basis points below industry average

SNL RRA: Formula rate plan provisions give rise to slight rate reduction, significantly below-average ROE

Commonwealth Edison Co.: Overview of the Energy Infrastructure Modernization Act (EIMA)

This report is part of the Regulatory Minute series. To view all featured Minutes, please click here.

Additional Contributing Author: Chris Becker

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