The ComEd bribery scandal led to the downfall and prosecution of former Illinois House Speaker Michael Madigan, the longest-serving statehouse speaker in American history. Four former ComEd executives and lobbyists await sentencing after being convicted by a jury.
The company itself, however, has suffered minimal punishment — and could soon enjoy rich rewards. If regulators at the Illinois Commerce Commission approve a proposed order in ComEd’s pending multiyear rate case, the company would earn a virtually guaranteed $1 billion this year. This is more than five times the $200 million criminal penalty the company paid under its deferred prosecution agreement with the U.S. Department of Justice.
Under the proposed order, ComEd’s profits would increase to $1.2 billion by 2027 and total $4.6 billion over four years. For context, the company’s profits were less than $3 billion across the decade that preceded its bribery scheme.
A primary goal of the 2011 “formula rate” law, the key law passed as a result of ComEd’s scheme, was to increase and guarantee ComEd’s profits. To increase profits, ComEd designed the formula in a manner observers at the time predicted would result in a decade of double-digit profit rates. Surprisingly, the formula produced relatively low profit rates. The formula was tied to interest rates, which remained stubbornly low over most of the decade.
To guarantee profits each year, if ComEd’s revenue fell short or costs shot up, the difference between expected and actual revenues and costs would be added to customers’ bills the following year. Even with lower than expected profit rates, the profit guarantee proved wildly successful for ComEd.
Despite the scandal, the Illinois General Assembly carried versions of those policies forward through new legislation in 2021 (over loud objections from the Illinois Public Interest Research Group), with a few tweaks that could be even more profitable for ComEd. The new rate-making structure maintains the formula rate policy that guarantees profits, while returning the profit rate decision to regulators, presenting a potential windfall for ComEd: If regulators approve a profit rate for ComEd in line with what they recently approved for other utilities, ComEd’s guaranteed profits will shoot up dramatically.
Under the terms of the proposed order regulators are considering, ComEd’s average annual profit over the next four years would be more than double the average over the formula rate years. But regulators don’t have to approve ComEd’s profit level in line with other utilities, and they shouldn’t.
As regulated monopolies, utility profits are set by regulators, not by the rigors of a competitive market. The goal is to determine the minimum return on investment a person would need to invest in a given utility, given its riskiness in comparison to other investments.
Here’s the challenge: This level of required return is not an observable fact. That is why regulators — and the utilities and other parties arguing before them — rely on tools developed by Wall Street analysts to evaluate companies operating in competitive markets and apply them to utilities.
This analysis gets arcane and technical very quickly. In the ComEd rate case, as in others, competing experts filed hundreds of pages of dense testimony arguing over proposed profit levels that at times differed by fractions of a percentage point but represented tens of millions of dollars for the company.
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This can lead one to think that setting the profit rate is a technical question, best answered by highly specialized experts. But the analysis is more art than science. While using the same objective formulas, experts make highly subjective determinations of the inputs to those formulas. These determinations require fair judgment.
At its core, the commission must judge ComEd’s risk compared with other investment opportunities. In terms of risk, the General Assembly has made ComEd more like a government bond than an average company listed on the stock market. Yet ComEd proposed a return of 10.5%, which is higher than average market returns.
Small differences in ComEd’s profit level will have big impacts on customers’ pocketbooks, especially those who struggle to pay all the bills for their rent, utilities and other necessities. If, instead of the profit level in the proposed order, the commission adopts the profit level recommended by our expert witness, it could save ComEd customers close to $1 billion over the next four years. Adopting a modest proposal we made in response to the proposed order could save customers $176 million.
The profit rate decision is fundamentally a policy decision. In its gas utility rate decisions, the Commerce Commission, recently overhauled by Gov. J.B. Pritzker, laudably stood up for utility customers and restored much-needed accountability over Peoples Gas and other gas utilities. We encourage the commission to do the same in determining ComEd’s profits.
Abraham Scarr is director of the Illinois Public Interest Research Group, better known as PIRG. Dan Schneider is a senior attorney for Legal Action Chicago.
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