Business Context and Reporting Period
This Form 8-K is a joint current report filed by Exelon Corporation and its subsidiary, Commonwealth Edison Company (ComEd), on September 30, 2010. The filing addresses a significant legal ruling by the Illinois Appellate Court regarding ComEd's electric distribution rate case originally filed in 2007 and approved by the Illinois Commerce Commission (ICC) in 2008.
Key Financial Metrics and Impacts
The filing details estimated pre-tax financial impacts resulting from the court's decision to remand the rate case and reverse the approval of a specific cost-recovery rider (Rider SMP). The filing does not provide consolidated revenue, profit, or cash flow figures for the reporting period, focusing instead on specific regulatory adjustments.
| Impact Category | 3rd Quarter 2010 | 4th Quarter 2010 | Jan 1, 2011 - May 31, 2011 |
|---|---|---|---|
| Revenues Subject to Refund | $0 | $(18) million | $(30) million |
| Reduced Pre-tax Earnings (Rider SMP) | $0 | $(1) million | $(7) million |
| Write-off of Rider SMP Regulatory Asset | $(4) million | $0 | $0 |
Annualized Estimates:
- Rate Base/Depreciation Adjustment: Estimated $77 million annual reduction in pre-tax revenue.
- Rider SMP Loss: Estimated $5 million reduction in 2010 pre-tax earnings (including the $4 million Q3 write-off).
- 2010 Rate Case Impact: Estimated $85 million annual revenue reduction against a requested increase of $396 million.
Material Changes and Legal Ruling
The Illinois Appellate Court issued a decision on September 30, 2010, overturning key aspects of the ICC's 2008 order:
- Rate Base Adjustment: The Court held the ICC abused its discretion by failing to reduce ComEd's rate base to account for 18 months of accumulated depreciation on pro forma plant additions. The case was remanded to the ICC to implement this adjustment.
- Rider SMP Reversal: The Court reversed the ICC's approval of Rider SMP (covering 131,000 smart meters), ruling it constituted illegal single-issue ratemaking. The Court established a stricter standard for future cost-recovery riders, requiring costs to be imposed by "external circumstances" and be unexpected or volatile.
- Refund Obligation: The ruling may trigger a refund obligation effective as early as September 30, 2010. ComEd will continue billing existing rates but must recognize an estimated refund liability for accounting purposes.
Outlook, Risks, and Management Commentary
Next Steps: Parties may seek rehearing by October 21, 2010, or appeal to the Illinois Supreme Court by November 4, 2010. If no further proceedings occur, the case returns to the ICC around November 10, 2010, to determine new rates and refund amounts.
Management Commentary: ComEd estimates the impact on rates and refunds will be prospective from the date of the ruling. The company notes that the depreciation ruling makes it highly unlikely the ICC will rule in ComEd's favor regarding the 2010 rate case. ComEd is evaluating alternatives and the potential financial impact, including potential interest charges on refunds.
Risks: The filing includes standard forward-looking statement disclaimers. Actual results may differ due to the outcome of rehearing requests, Supreme Court appeals, and the final rate determination by the ICC.
Investor Verification Checklist
- Verify the status of any rehearing requests or appeals to the Illinois Supreme Court filed by the October 21 and November 4 deadlines.
- Monitor the ICC's proceedings on remand (expected November 2010) to determine the final refund amount and new rate structure.
- Assess the impact of the $77 million annual revenue reduction estimate on ComEd's 2010 and 2011 earnings guidance.
- Review the treatment of the $4 million regulatory asset write-off in the third quarter financial statements.
- Confirm whether the ICC allows the inclusion of additional net plant investment (up to three months) to partially mitigate the depreciation adjustment.