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Latest Developments
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General Queries and Responses
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Auction Process Specifics
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Latest Developments
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1.
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Q.
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What is the purpose of the Ameren Electric Utility Companies’ filing?
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A.
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Ameren wants to minimize the impact that expected electric cost increases would have on our Illinois customers as Illinois utilities begin having to purchase power based on prices that result from the auction and as the 10-year rate freeze for residential customers comes to an end.
Ameren Illinois companies are proposing a phased-in rate increase plan that would ultimately be less expensive for customers, while protecting the utilities’ credit ratings and allowing for the full and timely recovery of purchased power costs. The filing is a first step to state our case before the regulators. To implement the proposal, once legislation is in place, we must have regulatory approval for the phase-in plan to enable it to go forward.
The plan would protect the Ameren Illinois utilities’ ability to continue to provide reliable electric service to our customers. Financially stable and credit-worthy Ameren utilities are necessary to assuring reliable service at affordable rates.
Ameren Illinois companies believe the best solution is for the legislature to adopt a bill that would allow our utility companies and other utilities to defer and securitize expenses to ease the transition to new rates and preserve the utilities’ financial integrity.
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2.
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Q.
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What is securitization?
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A.
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Securitization is a special financing technique by which a bankruptcy-proof special-purpose entity, set up by the utility, sells securities (low-interest bonds) and uses the proceeds to purchase, from the utility, the right to put a special charge on customer bills. The special charge on the customer bills generates the cash that is used to pay interest and principal on the bonds.
In this instance, the utility uses the proceeds from the securitized debt to pay for new power procurement costs that were deferred during the initial years of the phase-in plan. The future payments used to pay interest and principal on the securitized debt are, in effect, the charges utility customers will pay in the future for power used—but not yet paid for—during the phase-in period.
Securitized bonds are typically rated AAA/Aaa by rating agencies and have lower interest rates than taxable debt the utilities could issue.
Legislation is required to provide that over time, the collection through the special customer charge would be set at a level designed to generate sufficient revenue to fully service the bonds that were sold to pay for the deferred power supply costs.
This form of financing is a proven tool that has been used effectively in New Jersey, as well as other states (Connecticut, Massachusetts, Montana, Pennsylvania and Texas).
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3.
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Q.
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How does securitization benefit customers?
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A.
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This special financing method directly benefits residential customers by spreading out the repayment of the debt associated with the power supply expenses being deferred and collecting the associated amounts through a charge to customers over a period of up to 10 years.
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4.
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Q.
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Is this a one time occurrence, or will you be securing debt year after year to mange this phase-in effort?
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A.
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The phase-in plan would be a one-time arrangement to help our customers make the transition to rates based on the auction results.
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5.
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Q.
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Will another phase-in and deferral plan be offered?
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A.
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This arrangement is intended to consider the deferral of power supply costs for 2007 and 2008 only. We do not expect it to be repeated.
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6.
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Q.
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What are the amounts of the phase-in for the Ameren companies?
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A.
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The Ameren companies cannot develop a specific rate phase-in proposal or provide specific deferral amounts and rate caps until after the power auction has taken place, and legislation has been adopted.
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7.
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Q.
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What actions are being sought from the Illinois Commerce Commission?
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A.
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After enabling legislation is adopted, the ICC would need to authorize the use of securitization bonds, once it has determined that the financing plan will not adversely affect customers.
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8.
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Q.
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Why is legislation required prior to ICC approval?
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A.
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Legislation is required to permit the deferral of power supply costs for later recovery and to guarantee that future ratepayer monies are legally dedicated to repaying the securitized bonds.
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9.
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Q.
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Why have you filed this proposal with the ICC now if legislation is first required in order for the commission to take any action?
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A.
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With this filing, we are not asking the ICC for action now. We are making the Illinois Commerce Commission aware of the proposed deferral and financing plan so that they are prepared to act once legislation has been passed.
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10.
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Q.
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When do you expect the legislature to consider this issue?
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A.
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The next opportunity for the Legislature to take up the bill would be during the veto session in November.
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11.
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Q.
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Why does the securitization proposal only benefit residential customers?
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A.
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Our residential customers—who have been paying frozen, discounted, electricity rates for nearly a decade—will be most affected by future rate increases. Once competitive markets were introduced in 1997, non-residential customers became active in seeking out other electric suppliers to reduce their costs.
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12.
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Q.
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Does this proposal apply to any other utilities?
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A.
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The proposal by the Ameren Illinois utilities can apply to other Illinois electric utilities.
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13.
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Q.
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How have Ameren’s Illinois utility customers saved money or benefited to date? Has the company invested in its Illinois distribution business?
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A.
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Frozen to declining rates have been in place for 15 to 25 years for Ameren Illinois utilities’ residential customers. In aggregate, our Illinois customers have saved nearly $1 billion through the end of 2006 because of industry restructuring. Furthermore, Ameren Corporation and its investors have bought two struggling Illinois utilities in the past three years, investing nearly $1.5 billion of equity in the AmerenIP and AmerenCILCO distribution business. The money has been used to bring AmerenIP to above-investment grade rating and improve service reliability. Since the acquisition of AmerenCILCO, reported outages have dropped by 25 percent, and similar results are expected for AmerenIP.
In addition, Ameren Illinois utilities have invested more than $1.9 billion in infrastructure improvements since 1998, when the Customer Choice Law was established to create competitive energy markets in Illinois.
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14.
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Q.
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What are the Ameren Illinois utilities doing to mitigate the impact of higher electricity costs for low-income customers?
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A.
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In addition to the current energy assistance programs for low-income customers – for example, the Dollar More and Warm Neighbors energy assistance funds – and a range of conservation efforts, Ameren Illinois utilities plan to offer programs to help low income customers better manage rate increases and to help all customers use electricity more efficiently. The programs are being developed and details will be announced soon.
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General Queries and Responses
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15.
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Q.
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There is talk of Ameren and other utilities declaring bankruptcy. What’s behind that?
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A.
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Ameren and its Illinois utilities are currently in solid financial health with investment-grade credit ratings. In fact, Ameren has essentially rescued two troubled utilities in Illinois. AmerenCILCO and AmerenIP and returned them to financial health through significant investment. However, contracts to supply the electricity we need for our customers expire at the end of 2006. Then, we will be required to purchase power in the wholesale markets. Like the coal and natural gas used to generate electricity, power costs have increased significantly above the levels reflected in our current rates.
Impact of Governor’s Action: Unfortunately, the governor of Illinois in a September letter to the Illinois Commerce Commission, which regulates electric rates, indicated that any rate increase would be unjustified despite our need to recover the higher costs for power. Working to keep our customers’ costs for electricity as low as possible, we have proposed a proven, transparent and highly competitive auction process for buying power. The governor has also expressed disapproval of this method for buying power, but has offered no alternative. Any decision or action that impairs the ability of AmerenCIPS, AmerenCILCO and AmerenIP to fully recover purchased power costs from our electric customers in a timely manner could mean:
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a significant drop in credit ratings―the independent assessment of a company’s financial strength that affects the company’s ability to borrow and the rates it pays when it borrows―ratings declines can mean a loss of access to the capital markets and higher borrowing costs
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a higher power supply costs
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an inability to make infrastructure investments resulting in loss of reliable delivery of electricity with a negative impact on customer service
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job losses
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in the worst case―financial insolvency for the utility
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16.
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Q.
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Explain the rating agency actions.
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A.
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As a result of the uncertainty in Illinois, rating agencies have lowered our credit ratings and are carefully watching the Illinois regulatory situation for further developments. Rating agencies are also concerned that if the governor’s position of no rate increases is followed to its extreme, the utility industry in Illinois could face a California-style meltdown. Ultimately, the utilities in California could not continue to incur more costs than their revenues covered. This situation led to the financial impairment for some of the utilities, which caused at least one California utility to declare bankruptcy.
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17.
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Q.
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Why do utilities need to buy electricity?
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A.
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In 1997, Illinois enacted the Electric Service Customer Choice and Rate Relief Law―also called “The Customer Choice Law”―which brought about a massive overhaul of state government policy toward investor-owned electric utility service, including changes that now make it necessary for electric utilities to purchase electricity from generating companies.
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18.
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Q.
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But don’t the electric utility companies generate their own electricity?
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A.
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Before the adoption of the Illinois Customer Choice Law, Illinois’ investor-owned electric utilities were vertically integrated―they generated electricity in their own power stations and then delivered that electricity to their customers through their own transmission and delivery systems. Since the advent of competitive markets, market forces determine how electricity will be provided to customers in Illinois, and customers have the right to choose providers of their electricity. (The Customer Choice Law also ushered in a freeze and reductions on retail residential electricity rates charged by investor-owned electric utilities—rate cuts of 20 percent for AmerenIP residential customers and 5 percent for both AmerenCILCO and AmerenCIPS residential customers.)
After 1997, a utility could operate as a functionally separated utility, or as an integrated distribution company (IDC). Illinois’ major investor-owned electric utilities, including Ameren’s Illinois utilities―are IDCs. With utilities owning little or no generation, they now focus on delivering electricity. Almost all of the generation assets those companies once owned are now with other unaffiliated generation companies or in separate non-rate-regulated affiliated subsidiaries that compete with other suppliers.
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19.
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Q.
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Then where do the electric utilities get their electricity?
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A.
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The electric utilities now rely on power purchase agreements to supply electricity to their retail customers who have not exercised choice. These agreements all expire at the end of 2006, and this is the primary reason for the auction process filing.
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20.
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Q.
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Why can’t the Ameren utilities just extend those contracts?
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A.
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Federal policy requires that a competitive procurement process be used when affiliated suppliers are being considered. Since the former AmerenCILCO and AmerenCIPS generating plants are now owned by non-rate-regulated subsidiaries of Ameren, the Ameren-owned electric utilities must buy electricity through a competitive process.
(NOTE: In addition, Ameren power plants do not have enough available generation to serve the bundled retail electric customers in the companies’ Illinois service territories. Only 4,000 megawatts of generation are available—that is not under contract―to supply the total Ameren utility companies’ load of 7,500 megawatts.)
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21.
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Q.
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If the utilities cannot extend their present contracts, how will they purchase electricity?
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A.
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The Ameren-owned electric utilities believe the most cost-effective way for utilities to purchase electricity is through a declining price auction (also called a reverse auction). In a traditional auction, the price continues to rise until the bidding process is completed. The object is to secure the highest possible price. In a declining price auction, the price for providing power is reduced in each round of the auction until arriving at the lowest possible rate at which there is sufficient capacity to cover load. In short, this type of auction is designed to assure the lowest possible price.
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22.
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Q.
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Word is that the purchase of electricity will mean rising costs. Why should the cost of electricity be going up after the rate freeze ends January 1, 2007?
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A.
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For several reasons:
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Collectively Ameren’s Illinois utilities have invested nearly $1.4 billion in transmission and distribution infrastructure investment since their last rate cases. When Ameren acquired or merged with Illinois-based companies, the expectation was that as Ameren made infrastructure investments to ensure reliability, rates would be re-set to reflect those investments.
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Electric rates for Ameren’s operating subsidiaries have been fixed or declining for periods ranging from 15 years to 25 years. Here are the dates of the last electric rate increases for each of Ameren’s companies and since those increases there were the following decreases:
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COMPANY
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LAST INCREASE
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TOTAL DECREASES SINCE 1997
(Residential Only)
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CILCO
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1982
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2% decrease in 1998
2% decrease in 2000
1% decrease in 2002
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CIPS
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1992*
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5% decrease
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*1992 marked only a 1% increase; before that CIPS had had no increase since 1982.
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UE-Ill.
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1985
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5% decrease
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IP
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1992
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15% decrease in 1998
5% decrease in 2002
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Possible rate increase estimates “of 20-35%” quoted by Ameren officials on September 28 are only estimates based on recent energy prices (and traditional cost-of-service ratemaking). We can’t speculate on what the market price for electricity will be in 2007 or whether traditional cost-of-service ratemaking will be followed in the future.
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Rates will include two core components―delivery and energy. The delivery component covers the entire cost of bringing electricity, regardless of who supplies it to the customer. This component not only covers the cost of delivery but provides a reasonable return on investment to the utility to encourage investment in plant and equipment required to maintain reliable delivery service. The energy component covers the actual cost of procured power. The Ameren Illinois utilities will simply recover the actual costs incurred.
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23.
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Q.
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What about the claim that there is not sufficient competition in Illinois? What is your position on that claim?
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A.
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We continue to believe that the best way for our customers electricity needs to be served is by our going to the wholesale markets to buy power in bulk on customers’ behalf in a highly transparent, competitive auction.
Those wholesale markets are quite competitive. More than 9,000 megawatts of new generation have been built in Illinois by new investors. The regional transmission system operator (Midwest Independent Transmission System Operator―MISO) itself has identified well over 120,000 megawatts of generating capacity within its footprint. Also, MISO has developed new energy markets—hourly energy markets, for example, that are subject to the Federal Energy Regulatory Commission market power mitigation measures.
Transmission access and generation deliverability standards are also greatly improved―all of which enhance the wholesale market. Today, all generating units will be able to participate in the MISO energy market, subject to MISO congestion management standards.
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24.
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Q.
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What legal precedent is there for recovery of electric supply costs by utilities?
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A.
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When the Illinois Customer Choice Law was passed, utilities were allowed to spin off their generation. Even though utilities no longer own generation, the law still requires these utilities to be the providers of last resort; therefore, the only lawful option is for utilities to buy power in the wholesale market. Clearly wholesale power and energy purchases are costs utilities must incur to serve their customers. That being the case, utilities are entitled to recover these costs. In fact, a utility purchasing power in the wholesale market and recovering those costs in retail rates is not a new phenomenon. This has been done for years.
When adopting the Illinois Customer Choice Law, the General Assembly contemplated a regulatory mechanism or process by which post-transition period rates would be set. This process fully envisioned the translation of wholesale power and energy costs into retail rates. The law cites that the commission may approve a tariff that provides for a determination of the market value for power and energy.
The form of the tariff we would be using to recover power and energy costs is no different from other tariffs the commission has previously approved and that have been affirmed by the appellate courts in Illinois.
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25.
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Q.
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What’s Ameren’s position on whether the Illinois Commerce Commission (ICC) has the legal authority to approve the auction of power?
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A.
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We believe that the ICC has the requisite legal authority to approve the auction, and the translation of its results into retail rates. We also believe that the ICC has the authority to approve the recovery of the wholesale market of costs for power procurement which stem from the auction process, and to formulate rates by which to recover related costs. We also continue to strongly believe that the auction we proposed on Feb. 28, 2005, is a transparent, competitive approach for supplying electricity to our more than one million Illinois electric customers following the Jan. 1, 2007, expiration of the rate freeze established by the Illinois Customer Choice Law.
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Auction Process Specifics
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26.
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Q.
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Who was consulted in developing the auction approach?
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A.
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The proposed auction process was endorsed by stakeholders participating in ICC-sponsored workshops addressing post-2006 issues last fall. The competitive auction process is required by, and consistent with, FERC guidelines, which also call for the use of a third-party, independent monitor.
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27.
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Q.
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How will a generation auction work? Will there be provisions that protect consumers?
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A.
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The process would include a number of provisions that will protect consumers.
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As proposed by Ameren’s Illinois utilities, the auction will be conducted by an independent auction manager.
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The ICC will oversee the auction through its auction monitor.
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After the auction is completed, the ICC will either accept or reject the results. When the ICC approves the results, the prices are made public.
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The auction is fair and transparent; the rules are clear and public.
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The bidding process works as follows: The initial price is set by the independent auction manager with the advice of the ICC’s auction monitor. The price starts high so as to attract the maximum number of bidders, who offer more power than the utility requires. As the auction manager lowers the price during the successive rounds of bidding, suppliers may reduce the amount of electricity they are willing to sell. The auction ends when the price falls to a point where suppliers have exactly enough electricity to serve the utility’s customers.
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The cost of awarded generation contracts would be immediately reflected and fully recovered in the generation component of bundled service rates, subject to full true-up and reconciliation.
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28.
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Q.
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How often would the auction be conducted?
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A.
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In the first year the entire load will be auctioned. Ameren plans to have contracts expire in one, two and three years for residential and most commercial customers. After the first year, one-third of the contracts will expire every year, so new prices are blended with prices obtained in previous years so as to guarantee that rising prices at any given time cannot unduly impact the price of the entire portfolio held by a utility. Due to their size and other factors, Ameren will supply its very largest customers with one-year electricity purchase contracts.
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29.
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Q.
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How will Ameren charge retail customers for power supply resulting from the auction?
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A.
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Ameren is proposing a rate structure that is consistent with current rate design and that addresses fairness and equity concerns for all customers. Ameren proposes to establish the following five (5) basic rate classes: 1) Residential, 2) Small General Service, 3) General Service, 4) Large Service, and 5) Dusk-to Dawn Lighting Service. These rate classes sort customers into groupings of consumers with fairly homogeneous load characteristics. All non-lighting class rates will include seasonally differentiated energy charges, and for classes 3) and 4) such seasonally differentiated rates will also be differentiated by the time of day. Seasonal and time of day differentiation of rates for energy reflect the differing costs of providing energy during varying time periods. It should be noted that all power procurement costs will be passed “dollar for dollar” to customers consuming the power. Ameren’s regulated utilities receive no financial gain or benefit from the sale of the power.
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30.
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Q.
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Can Ameren’s non rate-regulated affiliates sell or provide electricity to the Ameren utilities?
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A.
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Those affiliates could bid to serve the supply up to a cap of 35 percent, but only through this independently administered auction process. The Federal Energy Regulatory Commission (FERC) will not allow these affiliates to sell their electricity unless a competitive bid process is in place in the manner prescribed by the FERC. However, having affiliates bid in the auction is a good thing for customers―the greater the number of power supply bidders, the lower the ultimate price for generation.
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31.
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Q.
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Will the auction process interfere with my right or ability to buy electricity from another supplier?
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A.
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No, not at all. For additional information, visit the Illinois Commerce Commission’s Web site (http://www.icc.illinois.gov/pluginillinois).
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32.
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Q.
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Would the same rules regarding an auction apply for all distribution companies in Illinois?
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A.
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The rules would need to apply to everyone for a truly competitive market.
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33.
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Q.
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Can Ameren reject the qualified bid of a qualified bidder?
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A.
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No. This serves as an additional guarantee that a utility cannot influence the auction process.
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