by Bob Shively, Enerdynamics President and Lead Facilitator

As low load growth, increasing renewable generation, closing of traditional baseload fossil fuel plants, growth of distributed resources, and decreasing cost of storage have all become a reality, energy utilities are forced to rethink business models that have worked well for many years. In 2017 we began looking at specific U.S. utilities and how they are responding to the changing future of the energy company. We recently looked at Hawaii (Hawaii Electric – Leading the Way to 100% Renewables) and New York (Con Edison New York – Transitioning to a Distributed Services Platform Provider). In this post we explore ComEd, an electric-only utility that serves 3.8 million customers in Illinois.

ComEd’s service territory comprises most of northern Illinois including the Chicago metropolitan area. ComEd owns only transmission and distribution facilities. All generation was divested during deregulation. Customers of ComEd can choose distribution-only service with supply provided by a third party or can buy bundled service with supply provided by ComEd under regulated rates. Illinois also has an active municipal aggregation program where some communities choose to provide supply on behalf of their residents.

ComEd is owned by Exelon Corporation, one of the largest integrated energy companies in the U.S. Exelon has three major business lines including generation (35,500 MW of merchant generation including 20,300 MW of nuclear power), energy sales and service (the energy sales and services company Constellation), and transmission/delivery (6 electric and/or gas utilities including ComEd). Following are some important points to understanding ComEd’s transition to the future:

• ComEd’s earnings provide approximately 40% of the overall earnings for Exelon Corp. Exelon states that the parent company’s mission is to be the leading diversified energy company by providing reliable, clean, affordable and innovative energy products.  Exelon believes that an integrated business model provides them a unique view into the transforming industry and allows them to take advantage of a broad range of opportunities, rather than betting on any one segment of the industry.  Exelon owns six nuclear power plants in Illinois.  Two were slated to be closed due to low market revenues until Illinois passed the Future Energy Jobs Act (FEJA) in 2017. FEJA included a Zero Emissions Standard (ZES) which provides for payments to nuclear power plants in recognition of their zero-GHG generation.

• ComEd is regulated by the Illinois Commerce Commission (ICC). The ICC uses a formulaic ratemaking method that sets rates on an annual basis as shown in the graphic below.  ComEd does not have revenue decoupling, so earnings fluctuate annually based on actual sales.

Source: Presentation by Anil Dhawan, ComEd Sr. Electrical Engineer June 2014

• The formulaic ratemaking provides regulatory certainty through use of a predictable, repeatable process. But it also has provided ComEd some of the lowest ROEs in the U.S.  For example, the current ROE is 8.59%, set using the formula based on the average 30 year Treasury yield + 560 basis points for a risk premium – a 5 basis point penalty for failure to achieve performance based metrics in prior years. Performance metrics include budget controls, outage duration and frequency, safety, customer service, efficiency and productivity, and environmental compliance. To obtain the formula ratemaking, ComEd agreed to meet infrastructure investment targets and to create at least 2,000 full-time equivalent jobs or make payments to a state job training program. The utility’s failure to meet these requirements or certain other performance targets can result in discontinuation of the formula rate, in which case rates would be frozen at current levels until a new general rate case is completed.

• The 2011 Illinois law, the Energy Infrastructure and Modernization Act (EIMA) that approved the new formulaic ratemaking process also authorized a $2.6 billion ComEd grid modernization program. Illinois was recently recognized by the Gridwise Alliance as second highest U.S. state for grid modernization.

• In addition to creating the ZES, the 2017 FEJA law extended the formulaic ratemaking through 2022, set an RPS goal of 25% by 2025, and set demand reduction targets of 17% by 2025. Under the law, ComEd will be able to ratebase certain energy efficiency and rebate expenditures meaning they can earn a rate-of-return on these.  The law also laid out a path to transition from net-metering for DERs to a value-based payment (locational and time-based).

• The ICC initiated the Next Grid Study in September 2017. The study’s goal is to address critical issues facing Illinois’ electric industry in the future and to provide a final result discussing opportunities, challenges, and recommending actions. Current working groups include: a) new technology deployment and grid integration, b) metering, communications and data, c) reliability, resiliency, and cyber security, d) customer and community participation, e) electricity markets, f) regulatory, environmental and policy issues, and g) ratemaking.

• In preparing for the future, ComEd notes three key trends: accelerating technology innovation, exploding levels of data, and the connectivity of everything.  The result is customers who demand more choices, more control, and more convenience.  Given these trends, ComEd believes utility services will need to evolve:

Source: Perspectives in Grid Transformation from Illinois, Jane S. Park, Com Ed VP of Regulatory and Policy, November 2, 2017

• ComEd believes that future of utilities lies in value generation through platforms:

Source: Perspectives in Grid Transformation from Illinois, Jane S. Park, Com Ed VP of Regulatory and Policy, November 2, 2017

• And it sees the industry organization around four interactive layers:

Source: Perspectives in Grid Transformation from Illinois, Jane S. Park, Com Ed VP of Regulatory and Policy, November 2, 2017

• Current programs ComEd is using to test these concepts include the ComEd Energy Marketplace platform which allows consumers to purchase energy-related products and obtain point-of-purchase rebates, a community energy storage pilot, a proposed microgrid project, and replacing 18,000 ComEd-owned streetlights with new “smart-ready” LED lights (these will allow municipalities to remotely dim lights for energy savings, remotely brighten or flash them for safety, and receive immediate notification of lamps in need of maintenance).

ComEd is an example of a utility that is attempting to move rapidly to face a changing future.  ComEd has worked closely with its regulator the ICC to put in place regulatory mechanisms that support this transition, even though ComEd has accepted a low ROE in return for regulatory certainty.  The Illinois legislature has been proactive in passing laws that support the transition, while also attempting to provide for a key driver in Illinois politics – maintaining jobs.  The ongoing Illinois NextGrid Study will drive future policy changes.  ComEd will likely be a model utility for others to study in designing ways to manage a successful transition to the future energy world.