Business Context and Reporting Period
This Form 8-K Current Report, dated October 26, 2011, is filed jointly by Exelon Corporation and its subsidiary, Commonwealth Edison Company (ComEd). The filing addresses the immediate enactment of Illinois Senate Bill 1652 (SB 1652) and House Bill 3036 (the Trailer Bill) following the Illinois General Assembly's override of the Governor's veto. The legislation establishes a new regulatory framework for ComEd involving significant capital investment and performance-based rate setting.
Key Financial Metrics and Investment Commitments
- Total Capital Investment: ComEd intends to invest approximately $2.6 billion over the next ten years, incremental to planned expenditures.
- Smart Grid Allocation: Approximately $1.3 billion is designated for smart grid and smart meter technology, including installation in every home and consumer education.
- Infrastructure and Storm Hardening: Approximately $1.3 billion is allocated for infrastructure improvements, including $200 million specifically for storm hardening the distribution system.
- Customer Assistance: ComEd will contribute $10 million annually for five years to fund assistance programs for low-income customers, seniors, and veterans.
- Innovation Fund: An initial contribution of $15 million is made to a new Science and Technology Innovation Trust fund.
- Job Creation: The investment cycle is expected to create 2,000 full-time equivalent jobs at its peak.
Material Changes and Regulatory Framework
The legislation introduces a performance-based formula rate tariff similar to the Federal Energy Regulatory Commission's process for transmission rates. Key changes include:
- Rate Filing Timeline: ComEd expects to file its initial performance-based formula rate tariff by November 10, 2011, based on 2010 costs and 2011 plant additions. The Illinois Commerce Commission (ICC) must issue an order by May 31, 2012, with rates taking effect 30 days thereafter.
- True-Up Mechanism: An annual "true-up" of revenue requirements to actual prudently incurred costs will occur. The initial true-up filing is due in May 2012, with adjusted rates effective January 1, 2013.
- Return on Equity (ROE) Caps: Subsequent to the first true-up, ROE is limited to the 30-year treasury note rate plus 580 basis points. For the first true-up, the cap is the 30-year treasury note rate plus 590 basis points. This is noted to be lower than the ROE approved by the ICC effective June 1, 2011.
- Performance Penalties: The ROE rate is subject to reduction by up to 30 basis points annually (increasing to 38 basis points in the final four years) if ComEd fails to meet specific reliability and customer service milestones.
Outlook, Risks, and Contingencies
ComEd is currently assessing the financial effects of the legislation. The statute includes specific termination triggers to protect consumers:
- Rate Increase Cap: The program terminates if the average residential rate increases by more than 2.5% annually from June 2011 through May 2014.
- Time Limit: The legislation terminates after December 31, 2017, unless approved to continue by the Illinois General Assembly.
- Forward-Looking Statements: The filing contains forward-looking statements subject to risks and uncertainties, including those detailed in Exelon's 2010 Form 10-K and 2011 Form 10-Q.
Investor Verification Checklist
- Verify the specific ROE percentage resulting from the 30-year treasury note rate plus 580/590 basis points compared to the previous ICC-approved rate.
- Monitor the November 10, 2011, initial rate filing and the subsequent ICC order deadline of May 31, 2012.
- Track the annual residential rate increases to ensure they do not exceed the 2.5% threshold which would trigger program termination.
- Review the specific reliability and customer service metrics required to avoid ROE reductions.
- Assess the impact of the $2.6 billion incremental capital expenditure on ComEd's future cash flow and debt levels.