State of Deregulation: Illinois resting comfortably at halfway point though questions remain

Kathleen Davis, Associate Editor

Nicor Energy’s (an alternative retail supplier) company Web site screams competition.

Actually, it screams: Offer ends Mar. 20, 2001 in a continuous scroll.

Still, in a state only midway through restructuring, such blatant marketing reflects a modicum of success not usually associated with deregulation as of late. It seems, in Illinois, deregulation is moving along quite smoothly. And in an industry up to its neck in the rapids of a “California crisis,” a sea of tranquility is a nice change of pace.

However, some Illinois marketers fear that the calm could be merely the eye of the hurricane; a number of questions remain unanswered in the Illinois energy arena.

A look back

Deregulation in Illinois began when House Bill 362 was signed into law in December 1997, which brought about a 15 percent rate decrease for residential customers in August of 1998 (even though the residential market will not be fully open to competition until 2002). In fact, it is estimated that customers of Illinois Power have saved approximately $12.5 million from that cut alone.

“The legislature wanted to bring the benefits of competition to Illinois electric consumers in a way that carefully balanced everyone’s interests,” said Arlene Juracek, vice president of access implementation at Commonwealth Edison (ComEd), emphasizing that the writers of the restructuring bill were careful to balance competition and continuity.

“Moving to a competitive world could not jeopardize the reliability of the electric service, the efficiency of that service, the equity in the provision of that service or the environmental quality in the provision of that service. The goal, of course, is to give the customers the benefit of innovative new products and services and opportunities to save money in the process,” she added.

And the process rolled along quite nicely for awhile. Real time pricing became available for business customers in autumn 1998, and open access plans and delivery service tariffs (which allow alternative power generator to use existing utility wires and cables for a fee) clicked into place in spring 1999. In the fall of that same year, business customers over 4 MW and a third of smaller commercial and industrial customers (most selected by lottery) were allowed to choose their power generators.

On New Year’s Eve 2000, the remaining commercial and industrial customers were released into the open market, marking a midpoint for deregulation in Illinois. The state should be fully deregulated (including an end to transition charges) by 2006.

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Illinois residents who may be looking toward San Diego with a watchful eye should note that-so far-the state’s move toward deregulation has not created such serious and costly glitches as those in the Golden State. In fact, a number of eligible commercial customers have switched to alternative suppliers, especially in ComEd territory. (See figure.)

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According to both the Energy Information Administration (EIA) and consultants XENERGY, about 12 percent of ComEd’s eligible customers (representing approximately half of the company’s load) switched to alternative suppliers. (See Table 1, Table 2). Both Illinois Power (IP) and AmerenCIPS had 7 percent switch, but as of December 2000, none was recorded for Illinois Light Co.

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IP has taken a bit of heat in the Illinois energy arena. In 2000, they locked in a number of their larger commercial and industrial customers with discretionary contracts, a move that some see as an “in-your-face” snub of alternative providers. Representatives of alternative suppliers, who wished to remain nameless, are still smarting from IP’s action. One labeled it “vigorous resistance” of deregulation; another stated that the utility’s action “largely squelched the market, and they did it rather blatantly.”

On the other hand, the Illinois Commerce Commission (ICC), who oversees regulated operations and services of electric, gas, telephone, water and sewer utilities, believes that a lack of competition in some areas could be created simply by a lack of available suppliers, along with shortages, problems with transmission systems and inter-connection standards, and a lack of restructuring legislation in surrounding states.

In their report “Assessment of Competition in the Illinois Electric Industry Three Months Following the Initiation of Restructuring,” the ICC also traced ComEd’s restructuring progress to the fact that the utility has fairly high rates compared to the rest of the state, a factor a number of alternative suppliers brought up as well when asked about the concentration in the ComEd area. (The EIA reported customers in the ComEd area were realizing anywhere from a five to 15 percent savings from competitors.)

Chicago is one of those ComEd customers exploring power options. Exercising the city’s rights under the new restructuring legislation, Chicago mayor Richard Daly has announced that the city (along with 47 other local government bodies) plan to aggregate their power purchases, and they are requiring that a minimum of 20 percent of that purchase (which will be approximately 80 MW) come from renewable resources. A request for proposal (RFP) has been issued to the licensed power providers in the state. Now it’s simply a game of wait and see.

Who’s in the game

Illinois’ restructuring bill states, “Competition in the electric services market may create opportunities for new products and services for customers and lower costs for users of electricity.” An influx of new power suppliers is hoping to make that prediction fact.

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To become an alternative retail electric supplier (ARES) in Illinois, a provider must apply to and be certified by the ICC. Nicor Energy is only one company in a fairly substantial list of alternative energy providers registered to provide power in the state. Major power players like Enron and Dynegy Energy Services are nestled next to smaller corporations like Nicor in the mix. (See Table 3).

And those alternative suppliers have been quite busy.

Enron Energy Services, a subsidiary of Enron Corp., and Owens-Illinois Inc., a provider of glass and plastics packaging, signed a 10-year energy management agreement last month which covers 53 Owens-Illinois manufacturing facilities in 20 states (including Illinois) and will cover projected energy purchases in excess of $2 billion.

It’s an agreement everyone’s happy about, especially Enron.

“Our partnership with Owens-Illinois is a showcase of the depth of Enron’s continuing expansion into the industrial market,” stated Lou Pai, chairman and CEO of Enron Energy Services.

Richard Jun, vice president of corporate purchase for Owens-Illinois added, “This contract with Enron effectively adds its leadership in energy purchasing management to our ongoing commitment to cost management, an arrangement that should provide savings and reduce our exposure to short-term energy price fluctuations.”

Enron has also locked Pilkington North America Inc.-a division of the UK-based glass manufacturer-into a 10-year deal.

“Since energy is a significant expense in our business, we must manage our energy consumption and price risk carefully,” stated Rick Karcher, president of building products, North America for Pilkington, adding that the company hopes their agreement with Enron will do just that.

And that agreement, valued in excess of $500 million, does not stop at the state borders. It also covers the other eight Pilkington facilities on U.S. soil in North Carolina, Kentucky, Indiana, Ohio, Michigan and California.

“Pilkington clearly understands the significant value derived in aligning itself with a company well-versed in managing energy,” commented Jeremy Blackman, chief operating officer of Enron Energy Services, North America.

But Enron isn’t alone in snagging choice Illinois contracts, AES-owned CILCO has been selected as the electric energy provider for Wal-Mart. Beginning last month, the company began supplying power to Wal-Mart stores located in northern Illinois.

And CILCO has also been chosen to administer the electric program for the Illinois Energy Consortium (IEC), a collection of schools and public institutions interested in exploring choice options under the state’s restructuring plan. The IEC, a not-for-profit corporation, is a joint program of the Illinois Association of School Boards, Illinois Association of School Administrators and Illinois Association of Business Officials.

As the program administrator, CILCO will provide a variety of services to members of the consortium, including analysis of electric bills, bill consolidation, managing suppliers along with utilities and ensuring reliability.

Scott Cisel, CILCO vice president touts the freedom of this program, stating that it allows IEC members to “better focus on their primary responsibilities of providing a good education for our students.”

Unfortunately, the peripheral issues associated with deregulation in the state have not been quite as polished-especially transmission.

Transmission snafu

Originally, it looked as if the Midwest Independent System Operator (MISO) would be the RTO of choice for Illinois. Then Illinois Power, Ameren and ComEd decided that the Alliance RTO (which also includes American Electric Power, Consumers Energy, Dayton Power & Light, Detroit Edison, Dominion Virginia Power and FirstEnergy Corp.) had more appeal.

The announcement of withdrawal came in December. Both MISO and the ICC protested. In January, the ICC petitioned FERC for arbitration. Two weeks later, though, FERC gave its final approval to Alliance, creating havoc for MISO.

As of mid-February, however, the regional organizations were still embroiled in the tug-of-war. Both Alliance and MISO listed Ameren and ComEd as members of its community. In mid-January, Ameren announced that the company was recording a $25 million nonrecurring charge as a result of their decision to withdraw from MISO, a charge which relates to Ameren’s estimated obligation under the MISO membership agreement for costs incurred by the organization.

However, on February 6, MISO filed an official protest against Ameren’s withdrawal with the Federal Energy Regulatory Commission (FERC).

With three major power powerhouses looking toward Alliance, there was a conditional shift of six more: Central Illinois Light Co., Cinergy Corp., Hoosier Energy R.E.C. Inc., Southern Illinois Power Coop., Southern Indiana Gas & Electric Co. and Wabash Valley Power Assn. The six believed that the withdrawal of Ameren, ComEd and Illinois Power would make it impossible to integrate the MISO system, effectively leaving Central and Southern Illinois MISO islands in an Alliance sea.

In late February, Alliance reached an agreement with MISO that allows both to operate independently but establishes a uniform pricing structure and cooperation with power transactions. If apporved by FERC, the agreement will also let Ameren, ComEd and IP shift to Alliance.

The future

And there are still other elements in question, including uncertainty centered around how to calculate market value (which represent the “prices to beat” and are estimates of wholesale prices), the high wholesale prices of recent months (which ties back into those market values), the fear emanating from the California market and competition from neighboring Ohio.

Philip O’Connor, the president of AES’ NewEnergy Midwest, sees the current state of deregulation in Illinois as “on the right trajectory, but unsettled.”

“The key problem is that there is not a sufficiently strong commitment by some players to really making competition work,” he stated. “There is always the possibility just over the horizon that one interest or another might prevail.”

“The ICC has made many good decisions, and several not so good ones,” he commented. “But there is not yet a clear and reliable philosophy of competition articulated by the ICC.”

According to XENERGY, ComEd, Illinois Power and Ameren have all proposed market-index based proposals. In fact, ComEd’s has been in place for several months, and, so far, it’s working out well. With the same issue in mind, the ICC recently granted a NewEnergy proposal to reopen market index hearings. This leaves a lot of pricing issues up in the air.

“There are some very much needed changes to the utility proposals, and we hope the ICC will make those changes,” O’Connor stated.

On top of such turmoil, Ohio also opened its market to retail choice in January, and many marketers cross over, covering both Illinois and Ohio. It is entirely possible-and a consultant’s worst fear-that some marketers may choose to shift marketing resources to Ohio instead.

And then there’s the debate over the Power Purchase Option (PPO), an adjusted version of the market value that locks in that price for the customer signed into the program. No one is quite sure what to do with the PPO. Either the incumbent utility or an alternative supplier can give the PPO. Fees are stacked atop the PPO price as well, but customers also receive discounts-sometimes.

PPOs-like those frozen rates in California that are causing so much heartache for PG&E and Southern California Edison-are fine during off months, but they are hard to keep to with peak usage. Some marketers try to sign customers to long contracts in order to balance it out over the long haul; others simply only offer savings when they can. But, it’s a popular option for customers. Customers like the PPO-by nearly 40 percent in the ComEd arena.

The largest problem with the PPO lies with trying to compete against it. It’s difficult for an alternative supplier to be able to match or beat the PPO. Some have, instead, chosen to jump on the bandwagon. Still, it can be considered a market burden for others.

One anonymous marketer implied a shady combination of alternative supplier and PPO, insinuating that some competitors disguise the PPO as “deal” over the incumbent supplier-although such insinuations are indeed false.

“There is really no need for the PPO, and it should be repealed,” added O’Connor. “But, that’s not likely.”

On top of all these questions, rumors of switchbacks before the summer continue to circulate-again related to those high wholesale prices and the bad press from California.

Richard Mathias, chairman of the ICC, wants to reassure the state that California’s deregulation woes will not migrate east. He points out that the divestiture clause that required California utilities to sell non-nuclear and non-hydroelectric generating facilities is not paralleled in Illinois law. In fact, a number of Illinois utilities have simply transferred ownership of generation to affiliates, effectively keeping it in the family and in control. Mathias also noted that Illinois has no similarities to the California Power Exchange, which is often accused of being a major cause of the dysfunctional market now apparent in the state.

California’s supply problem is also not reflected in Illinois, Mathias stated.

“Most commentators agree that Illinois currently has adequate base load supply and peak load likely is adequate as well,” he wrote in his report on the subject, the apropos entitled “Can a California Energy Debacle Occur in Illinois?”

However, he does point out that concern about future supply is circulating.

Christopher Dyson, a consultant with XENERGY, sees yet another problem with the newly opened commercial and industrial market: no new customers.

“Most of the low-hanging fruit has already been picked,” he said. “I am somewhat skeptical about how much these newly eligible retail customers will increase Illinois switching rates.”

“Many of these newly eligible customers are either uninterested in retail choice or have undesirable load characteristics. Otherwise, they would have entered the retail choice lottery back in 1999,” he stated.

Nicor Energy’s Web site seems to reflect an ARES’ competitive prayer that Dyson is not predicting the future. It’s a faith they are putting a lot of time, effort and cash behind, both online and off.

In fact, if you are a commercial or industrial customer you could have a live online consultation with a Nicor representative right now, at a click of your mouse. Competition couldn’t be simpler.


Christopher Dyson, a consultant with XENERGY can be reached via e-mail at cdyson@ xenergy.com or via phone at 608-277-9696.

Richard Mathias’ comparative outline “Can a California Energy Debacle Occur in Illinois?” can be accessed online through the Illinois Department of Commerce (www.commerce. state.il.us).

NewEnergy’s Philip O’Connor can be reached via e-mail at poconnor@newenergy.com or phone 312-704-8141.

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