September 2007

ILLINOIS CONTINUES DOWN THE PATH OF

ELECTRIC RESTRUCTURING

Governor Rod Blagojevich has signed into law the 200-plus page Illinois Power Agency Act (Power Agency Act) (Public Act 95-0481).
On January 2, 2007, the statutory freeze on electric service rates for Illinois residential and small commercial customers ended, and rates rose. The Power Agency Act represents the legislative response to the highly publicized concerns over these rate increases.

Signed on August 28, 2007, the Power Agency Act reportedly provides approximately $1 billion in rate relief over four years for residential and certain non-residential Illinois electric customers. More broadly, the Power Agency Act represents the continuing development of the electric restructuring process that started in Illinois in 1997, capping several other significant changes in the Illinois electricity regulatory landscape.

Rate relief is the most publicized aspect of the new legislation, but the Power Agency Act and other recently-enacted legislation also address several other important issues that present opportunities and challenges to various market participants. These developments include:

  • A new regulatory regime to oversee the utility power procurement process in Illinois, including establishment of the Illinois Power
    Agency – a new state agency to oversee a competitive power procurement process
  • Legislative declarations that the markets for large commercial and industrial electric users are now competitive
  • New energy efficiency and demand response requirements on electric utilities
  • New “renewable portfolio” standards
  • Relaxed regulatory requirements relating to utility reorganizations, plant retirements, asset transfers, and cost recovery mechanisms

Residential Competition Gets a Shot in the Arm

The Power Agency Act includes a legislative declaration that markets for large commercial and industrial electric users are now competitive. This resolves a number of regulatory issues that have consumed time and effort of the Illinois Commerce Commission (ICC). The Power Agency Act’s competitive declaration, taken in combination with other legislative developments, means that the ICC will almost surely now undertake expanded efforts to bring the benefits of customer choice to the residential market.

In 2006, the General Assembly enacted the Retail Electric Competition Act, which authorized the creation of the Office of Retail Market Development (RMD Office) (Public Act 94-1095). However, the RMD Office received no funding at that time. On August 13, 2007, the RMD Office received initial funding, and is expected to be up and running by mid-November (Public Act 95-0144).

In establishing the RMD Office, the General Assembly stated that “a competitive retail electric market does not yet exist for residential and small commercial customers.” Thus, the RMD Office is charged with “actively seeking out ways to promote retail competition” in Illinois. These activities will include:

  • Monitoring existing competitive conditions in Illinois
  • Identifying barriers to retail competitive for all customer classes
  • Actively exploring and proposing solutions to the ICC and the General Assembly

With respect to residential and small commercial retail electric competition, the RMD Office is specifically charged with preparing, within 12 months:

  • A detailed plan that is to be “designed to promote, in the most expeditious manner possible, retail electric competition for residential and small commercial electricity consumers while maintaining safe, reliable, and affordable service.”

To the extent that the RMD Office’s final plan calls for ICC action, the ICC must begin proceedings within 60 days after the plan’s submission and complete such proceedings within 11 months.

By enacting the Power Agency Act (including the competitive declaration regarding large industrial and commercial customers) and funding the RMD Office, the way has been cleared for the ICC to implement efforts to assist with the development of a vibrant competitive residential market for electricity in Illinois.

Abolition of the Reciprocity Requirement for Certification of Alternative Retail Electric Suppliers

In addition to the legislation establishing and funding the RMD Office and enabling the ICC to focus on residential competition, the General Assembly has relaxed the requirements for an out-of-state Alternative Retail Electric Suppliers (ARES) to obtain certification from the ICC.

The Illinois Public Utilities Act provides that a party wishing to sell electricity in Illinois as an ARES must obtain certification from the ICC. Previously, an applicant for an ARES certificate was required to demonstrate compliance with a complex “Reciprocity Provision” of the Illinois Public Utilities Act, among other requirements. The Reciprocity Provision essentially required a demonstration by a prospective ARES that an Illinois utility was allowed to serve retail customers located in the service territory of the ARES applicant or its affiliate. Satisfying the Reciprocity Clause involved a variety of complex technical matters, and the interpretation of the Reciprocity Provision was the subject of numerous disputed ICC proceedings and several cases before the Illinois Appellate Court.

On August 13, 2007, the General Assembly amended the Illinois Public Utilities Act to remove the Reciprocity Provision, effective January 1, 2008. Going forward, an applicant for an ARES certificate will no longer need to make any showing to satisfy the Reciprocity Provision. The removal of the Reciprocity Provision should make the ARES certification process substantially less complex and more efficient.

Other Legislative Action

In addition to the Power Agency Act, the General Assembly has passed additional legislation, including:

  • HB 0351 – Authorizes municipalities to file an electric aggregation plan with the ICC for approval (signed into law on August 21).
  • SB 0680 – Requires the ICC to establish standards for net metering and standards for interconnection of eligible renewable generating equipment (signed into law on August 24).
  • SB 0215 – Imposes duty on the ICC to annually review and reconcile utilities’ cost recovery related to its energy efficiency programs (amendatory veto issued August 28).
  • SB 1366 – Requires the ICC to create license requirements for retail electric brokers, agents, and consultants (certified to the governor
    on July 26).
  • SB 1299 – Utilities must file tariffs that provide the utility will offer single billing (combining the bills from the ARES and the utility) and buy back the uncollectible receivables of the ARES; also grants the ICC the authority to establish retail choice referral programs (awaiting certification to the governor).

Expect More Regulatory Activity, New Market Vigor

Although rate relief for residential and small commercial electric customers is the centerpiece of recent legislative developments in Illinois, the numerous changes in the law create a wide array of opportunities and challenges. The recent legislative activity sends a clear signal that the General Assembly has concluded that the competitive market has matured to a level that it can continue to provide benefits to Illinois businesses, and that the ICC should address the need for robust, competitive residential rates in the near future. We expect substantial regulatory activity in this area involving the ICC and the newly created Office of Retail Market Development.

With the deletion of the Reciprocity Provision from the ARES certification requirements of the Illinois Public Utilities Act, we foresee a reinvigorated interest from competitive suppliers seeking certification to participate in the Illinois competitive market for commercial, industrial, and residential customers. The certification process should now be less burdensome and more efficient.

We also anticipate interesting developments in the power procurement process established by the restructuring implemented by the Power Agency Act. The interplay between the newly created Illinois Power Agency, the ICC, and market participants at all levels promises a continuation of the dynamic and complex regulatory environment in the Illinois electric markets.