George Gross is a professor of electrical and computer engineering and at the Institute of Government and Public Affairs. He discusses the higher electric rates that went into effect on January 1, 2007. He was interviewed by the News Bureau’s business and law editor Mark Reutter.
Illinois residents will see the price of electricity go up as much as 55 percent when they get their bills in February. Why the sudden jump in prices?
A 10-year rate freeze that was imposed by the Illinois legislature has expired, and utility companies are implementing higher electric rates. The increased rates will be showing up on the January bills that people will start getting in the next few weeks. A major portion of the increase is a result of the higher costs of buying energy by the state’s two big utilities – Ameren and Exelon/Commonwealth Edison – which are being passed on to consumers.
Why was a rate freeze imposed in the first place?
As part of the 1997 Electricity Restructuring Act passed by the legislature, residential electric rates were set at artificially low levels for a seven-year period, which was later extended for another three years. This period was supposed to give time for competition to develop in the state, but, unfortunately, the low electric rates discouraged any potential competitors to the incumbent utilities from entering the market.
How were the new rates determined?
The new rates reflect the increases incurred by the utilities in the purchase of electricity for the next three years. Ameren and Exelon participated in a state-approved “reverse” auction to purchase electricity for residential customers. While the offers of 20-plus bidders indicated that there was competition in the wholesale electricity market, the resulting lowest bids accepted by the utilities still reflected the overall increase in the costs of electricity production.
How large is the rate increase?
It varies by distribution company. In the northern part of Illinois served by Commonwealth Edison, 3.3 million residential customers will be paying about 25 percent more for service. In the Downstate areas served by three Ameren subsidiaries, 1.2 million customers will be paying up to 55 percent more. However, the Illinois Commerce Commission (ICC) has given customers the option of a phased-in approach to absorbing the higher rates. This option will limit the rate increase to 10 percent a year in the ComEd region and to 14 percent a year in the Ameren territory over the next three years.
Did the utilities really need to pass on all of these costs to customers?
No business can afford to subsidize its products over the long term. The artificially low electric rates had to be stopped, and rates that realistically reflect actually incurred costs had to be implemented. The move away from the fictitious rates of the past may over time bring about the advent of competition in the retail sector. And eventually, this may reduce the prices paid by Illinois residents for electricity.
In the meantime, what can Illinois residents do to reduce their bills?
The impact on customers will be relatively small for the next few months because the majority of the winter bill is for gas purchases to heat homes. But as soon as it warms up and air conditioners start running, the steep price increases will be felt. Customers have the ability to cut their consumption through conservation or the implementation of energy-efficiency measures. In addition, recent decisions by the ICC allow customers to take service under a real-time tariff, so residents can use electricity in off-peak periods when the price is lower.
