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Exelon CEO Chris Crane

Exelon CEO Chris Crane

Chicago, IL February 14, 2017:  Chicago energy attorneys, Patrick N. Giordano and Paul G. Neilan, announced they filed a lawsuit in the U.S. District Court Northern District of Illinois today against Anthony Star in his Official Capacity as Director of the Illinois Power Agency.  Village of Old Mill Creek, et al. v. Anthony Star was filed on Tuesday, February 14, 2017 at the U.S. District Court Northern District of Illinois.

Attorneys Giordano and Neilan represent Plaintiffs that are governmental, residential, commercial, and industrial electricity consumers located throughout the State of Illinois. Plaintiffs claim that P.A. 99-0906, executed by Governor Rauner on December 7, 2016, violates the U.S. Constitution’s Supremacy Clause, Commerce Clause, and 14th Amendment Equal Protection Clause. The underlying basis for the constitutional claims is that the prices charged by electricity generating plants are subject to federal rather than state regulation. A similar case has already been filed in federal court in New York challenging that state’s subsidy of Exelon nuclear plants by the law firm Boies, Schiller & Flexner, LLP, which is headed by preeminent attorney David Boies.

Among other things, P.A. 99-0906 is designed to subsidize Exelon Corp.’s Quad Cities and Clinton nuclear plants. This subsidy will be charged to all Illinois electricity consumers beginning June 1, 2017 regardless of what company supplies the consumer’s electricity. The lawsuit specifically asks that the U.S. District Court grant a permanent injunction blocking the charges from going into effect as scheduled on June 1, 2017. According to Mr. Giordano: “These additional charges will reverse twenty years of deregulation in Illinois which have given us perhaps the one advantage we have over neighboring states: relatively low electricity charges due to an effectively functioning competitive market.” Mr. Giordano also said: “We’re challenging the nuclear bailout provision of the legislation because the prices charged by electricity generators have already been established by the competitive wholesale electricity market subject to federal jurisdiction and cannot be increased by the State of Illinois.”

The estimated impact to all Illinois consumers will be about $3.3 billion over the ten years of the nuclear bailout. Mr. Neilan points out that: “This nuclear bailout is one of four rate increases to Illinois consumers this year, including increased delivery charges, increased renewable energy subsidies, increased energy efficiency subsidies, and these nuclear energy subsidies.” When the nuclear subsidies go into effect on June 1, 2017, Illinois residents and businesses can expect to see an average 3% increase in their electricity bills due to the nuclear subsidies alone.”

Giordano & Associates, Ltd. is Chicago’s first law firm devoted to energy issues. We provide clients with experienced counsel on regulatory, litigation, transactional, and legislative matters in the areas of electricity and natural gas. Pat Giordano can be reached at pgiordano@dereglaw.com.

The Law Offices of Paul G. Neilan, P.C. represents commercial, industrial and governmental energy users in disputes against public utilities, as well as in litigation and transactional matters with non-utility competitive energy suppliers.

FACT SHEET

  1. Village of Old Mill Creek, et al. v. Anthony Star was filed in the United States District Court for the Northern District of Illinois on February 14, 2007.
  2. The Plaintiffs are: Village of Old Mill Creek, Ferrite International Company, Got it Maid, Inc., Nafisca Zotos, Robert Dillon,Richard Owens, and Robin Hawkins, both individually and d/b/a Robin’s Nest.
  3. The Defendant is Anthony Star in his official capacity as Director of the Illinois Power Agency.
  4. This case arises from unlawful Illinois legislation that invades the exclusive jurisdiction of the Federal Energy Regulatory Commission (“FERC”) over “the sale of electric energy at wholesale in interstate commerce” pursuant to the Federal Power Act. 16 U.S.C. 824(b)(1).
  5. The unlawful legislation is contained in subsection (d-5) Zero Emission Standard of Illinois Public Act 99-0906 (“P.A. 99-0906”), which was enacted on December 7, 2016 and is available at http://www.ilga.gov/legislation/99/HB/09900HB65761v.htm.
  6. Subsection (d-5) Zero Emission Standard of P.A. 99-0906 requires the Illinois Power Agency to procure contracts for Illinois utilities Commonwealth Edison Company, which serves northern Illinois, and Ameren Illinois Company, which services central and southern Illinois, for purchases of Zero Emission Credits (“ZECs”) from nuclear-fueled generating plants.
  7. The ZEC payments will be passed through by the utilities to all Illinois consumers through automatic adjustment tariffs.
  8. A. 99-0906 is designed to provide additional revenues to the Illinois-based Quad Cities and Clinton nuclear plants.
  9. Exelon Corp. owns both the utility ComEd and Exelon Generation, which owns the Quad Cities and Clinton nuclear plants that will sell the ZECs to the utilities.
  10. Although P.A. 99-0906 has many other provisions, this case concerns only subsection (d – 5) Zero emission standard.
  11. Plaintiffs are not challenging any other provisions of P.A. 99-0906. Section 97 of P.A. 99-0906 provides that the provisions of the Act are severable under Section 1.31 of the Illinois Statute on Statutes. 5 ILCS 70/1.31.
  12. In New York, ZEC payments to Exelon nuclear plants in that state are being challenged on the same grounds set forth by Plaintiffs in Illinois. Coalition for Competitive Electricity, et al. v. Audrey Zibelman, et al. was filed in the U.S. District Court Southern District of New York on October 19, 2016.
  13. A typical residential customer using 1 mWh (1,000 kWh) per month would pay an additional $2.64 per month beginning June 1, 2017 based on the initial ZEC price established in P.A. 99-0906.
  14. A manufacturing company using 10,000 mWh per month would pay an additional $26,400 per month beginning June 1, 2017 based on the initial ZEC price established in P.A. 99-0906.
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Coal mine, early 20th century

Coal mine, early 20th century.

There are mines and there are trenches, but they’re not the same. The so-called war on coal is a great story, but it’s a complete fiction. If there’s a war on steam coal, then there has to be a war on nuclear generation as well because they’re both in the same wholesale electricity market. You don’t have to look far to see Exelon and other nuke operators begging their state legislatures for additional subsidies for their plants. When wholesale electricity market prices are favorable, then coal mines and coal-fired plants (and nukes) extol the survival of the fittest in the Free Market, where only the most efficient competitors survive. But when that market turns on them, all of a sudden “the market is flawed,” and customers are no longer just customers; they’re “stakeholders.”

Be very afraid when anyone in the energy business starts calling you a “stakeholder.” It’s code for “we need you to pay us more money, but our reasons are really bad, so we have to fool you into believing that we’re all in this together.”

Coal mines are not being shuttered by the EPA or Hillary Clinton. The straight-up fact is that shale play natural gas has brought power prices down to levels not seen in years. Allied to this is the continued weak demand in what the feds tell us is our country’s longest (and slowest) economic recovery. The consequence is that low market electricity prices have persisted for an extremely long time.

The mines are being closed, and coal companies are declaring bankruptcy, not because politicians are waging some sort of trench warfare, but simply because of the price of coal, which varies directly with the price of natural gas.

Without doubt, new environmental rules have played a part in reducing coal-fired generation. But if you kick in the door on a house that’s in the process of falling down, don’t expect to be paid for the demolition job. A small decrease in the price of natural gas has a disproportionately large impact on demand for steam coal, and thus on the question of whether to shut a coal-fired station.

There’s no war on coal, and Don Blankenship, contrary to his claim, is not a political prisoner.

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Redheaded stepchild: Exelon's Byron nuclear plant

Redheaded stepchild: Exelon’s Byron nuclear plant

Listening to Exelon CEO Chris Crane extol the virtues of the free market and claim that his nuclear plant bailout bill is “market-based” is like listening to heavy metal/punk rock music performed by Pat Boone. The inauthenticity and cognitive dissonance are so fundamental as to cause revulsion at the cellular level.

Exelon introduced its bail-out legislation in the Illinois House of Representatives (HB3293) a few weeks ago. When we say Exelon introduced it, we mean exactly that. The notion that any of the bill’s sponsors in the House could understand the legislation, much less write it, is something only employees of Exelon and its public relations firm could say with a straight face.

The fiction that the Exelon bailout bill provides a “market-based” remedy is embarrassingly unconvincing, but, as Illinois’ long history shows, embarrassment is an emotion unknown to either Exelon or Springfield.

The key to HB3293 is Exelon’s Newspeak definition of “low carbon energy resources.” The Exelon lawyers who drafted HB3293 have cleverly sought to superimpose the imagery of the free market on a mechanism engineered to ensure that Exelon will have a monopolistic stranglehold on the sale of LCE credits. Exelon has tailored the term “low carbon energy resources” like a bespoke suit: it includes its own nuclear plants but excludes virtually all other generation that the average ratepayer might reasonably consider “low carbon.”

Exelon modeled HB3293 after the Illinois renewable portfolio standard. The bill amends the Illinois Power Agency Act by establishing a new “low carbon energy (LCE) credit” portfolio standard.

Beginning January 1, 2016 all electric utilities (such as ComEd, which, like the General Assembly, is one of Exelon’s wholly-owned subsidiaries) must purchase sufficient LCE credits to satisfy the LCE credit standard. The trick, of course, is that the bill authorizes electric utilities to recover all costs of purchasing the LCE credits from ratepayers. Thus, ComEd would once again serve as the tube through which Exelon hoovers up cash from ratepayers’ wallets for the benefit of its corporate treasury. (Headline: “Illinois legislation frees Exelon shareholders from fear of dividend cut.”)

Exelon’s definition of “low carbon” generation stipulates that no low carbon generation resource may have a power purchase agreement longer than 5 years. The effect of this unassuming little statutory quirk is to exclude virtually all wind, and much solar energy from the “low carbon” category. It would also exclude solar energy participating in the IPA’s supplemental procurement, which requires purchase contracts of at least five years.

The quantity of LCE credits that each utility must obtain is set at 70% of annual retail electricity sales. Taking 2012 as a sample year, total retail sales of electricity were approximately 143,540,000 megawatt-hours. http://www.eia.gov/electricity/state/illinois/ . (This figure would need to be adjusted by subtracting sales by electric cooperatives and municipalities that run their own systems, but it’s a serviceable proxy for our purposes.) This means that if HB3293 had been in effect for 2012, utilities would have had to acquire roughly 100,000,000 megawatt-hours of LCE credits. That’s a lot of LCE credits.

Exelon’s bailout bill then provides that the LCE credits must be procured from generating resources that are consistent with the “Minimum Internal Resource Requirements” (sic) for capacity established by the applicable regional transmission organization. HB3293 does not define this capitalized term, and a search of PJM (including the PJM manual on capacity markets) and MISO websites did not yield any defined term to match it. However, the term is likely another way to exclude wind, solar and perhaps other renewables from the LCE credit market because the concept of a minimum internal generation resource requirement applies in the context of assessing reliability across a given territory based on generation within it. Reliability, in turn, depends on dispatchable resources. Wind and solar are generation resources, not dispatch resources. Thus, if a particular wind or solar generator made it past HB3293’s first trench because it had a PPA with a term less than five years, it would still get caught on the barbed wire of Exelon’s “Minimum Internal Resource Requirements” criterion. Drafting a statute with a term that is both capitalized and in quotation marks without defining it may strike one as odd, but it’s not so by Exelon’s standards. Like Humpty Dumpty, when Exelon uses a term, it means exactly what Exelon wants it to mean, neither more nor less.

The first procurement of LCE credits will be under a five-year contract beginning January 1, 2016 to May 31, 2021. Just like Exelon’s Electric Infrastructure Modernization Act of 2011, the Exelon bailout bill gives the Illinois Commerce Commission a ridiculously short time period to review the LCE credit procurement plan: it must either approve the plan or approve it with modifications by November 1, 2015. The ICC has no power to disapprove the plan. Exelon wants to make sure that no one has a realistic opportunity to derail its bailout by asking annoying questions during pesky public hearings.

Although Exelon’s bailout bill will ensure that it can use ratepayer wallets as its own private ATM, it tries to camouflage this by providing that the LCE credit procurements must be “cost effective,” meaning that the incremental costs to consumers may not exceed certain limits (an annual average net increase in total costs per kilowatt-hour of no more than 2.015% of the amount paid by eligible retail customers for the planning year ending May 31, 2009).

Then, in a true Newspeak flourish, the Exelon bailout bill provides that “to ensure benefit to consumers,” winning LCE suppliers (note the plural noun; let’s pretend along with everyone in Springfield that there might be more than one) must commit to reimburse the cost of LCE credits for each planning year that the “forecasted average revenue” of the LCE resource that produced those LCE credits exceeds a set price per megawatt-hour. Note that this limitation applies only to the specific nuclear plant that generated the LCE credits in question. That means that if Exelon as a whole is doing just fine revenue-wise, but the three redheaded stepchildren (Byron, Clinton and Quad Cities) aren’t, ratepayers would still have to pay into Exelon’s corporate treasury. This is single-issue ratemaking writ large; that is, allowing a utility to single out specific cost or revenue components in order to recover them separately from ratepayers, without regard to the utility’s costs or revenues as a whole.

Yep, the Illinois Commerce Commission will hardly need any time to review Exelon’s procurement plan.

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Spent Nuke Fuel (No Swimming Allowed)

Spent Nuke Fuel (No Swimming Allowed)

Nuclear Energy Insider reports that Ukraine has begun building a central storage facility for spent nuke fuel:

Ukraine constructs Central Storage Facility for spent nuclear fuel | Nuclear Energy Insider.

How embarrassing would it be for the United States if, on the competent handling and storage of spent nuclear fuel, Ukraine makes more progress in two years than we’ve made in the last fifty.

Of course, Ukraine also has an incentive to become more energy independent. His name is Vladimir Putin.

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Exelon CEO Chris Crane

Exelon CEO Chris Crane

In our last post, we mentioned the Invisible Hand, an idea brought forth by the patron saint of Free Markets, Adam Smith. As we pointed out, Exelon on its website extols the virtues of the Free Market and anathematizes the very notion of subsidies to players in it — except, of course, when Exelon itself is the intended recipient of that subsidy.

The most common fault among those who claim to be Adam Smith’s intellectual descendants is that they have never actually read his book.  So, with particular regard to Mr. Crane’s insistence that Exelon is entitled to a subsidy for its nuclear plants, we thought it would be worthwhile to go straight to the font of all Free Market Wisdom and see what Smith might have to say about demands such as Exelon’s. Of course, there weren’t any nuclear generating stations in Smith’s day, but that’s an objection that could be raised only by small minds. Smith’s importance and relevance to the present day lies in the principles he developed, not in whether there are still pin manufacturers in Yorkshire. Accordingly, we pass on this excerpt from that Revealed Word of Economics, An Inquiry into the Nature and Causes of the Wealth of Nations, Book I, Chapter 11, Of the Rent of Land:

His [i.e., the labourer’s, as one who lives by wages] employers constitute the third order, that of those who live by profit. It is the stock that is employed for the sake of profit, which puts into motion the greater part of the useful labour of every society. The plans and projects of the employers of stock regulate and direct all the most important operations of labour, and profit is the end proposed by all those plans and projects…. The interest of this third order, therefore, has not the same connection with the general interest of the society as that of the other two. Merchants and master manufacturers are, in this order, the two classes of people who commonly employ the largest capitals, and who by their wealth draw to themselves the greatest share of the public consideration. As during their whole lives they are engaged in plans and projects, they have frequently more acuteness of understanding than the greater part of country gentlemen. As their thoughts, however, are commonly exercised rather about the interest of their own particular branch of business, than about that of the society, their judgment, even when given with the greatest candour (which it has not been upon every occasion) is much more to be depended upon with regard to the former of those two objects, than with regard to the latter. Their superiority over the country gentleman is, not so much in their knowledge of the public interest, as in their having a better knowledge of their own interest than he has of his. It is by this superior knowledge of their own interest that they have frequently imposed upon his [i.e., the country gentleman’s] generosity, and persuaded him to give up both his own interest and that of the public, from a very simple but honest conviction, that their interest, and not his, was the interest of the public. The interest of the dealers, however, in any particular branch of trade or manufactures, is always in some respects different from, and even opposite to, that of the public. To widen the market and to narrow the competition, is always the interest of the dealers. To widen the market may frequently be agreeable enough to the interest of the public; but to narrow the competition must always be against it, and can serve only to enable the dealers, by raising their profits above what they naturally would be, to levy, for their own benefit, an absurd tax upon the rest of their fellow-citizens. The proposal of any new law or regulation of commerce which comes from this order [i.e., the third order, that which lives by profit], ought always to be listened to with great precaution, and ought never to be adopted till after having been long and carefully examined, not only with the most scrupulous, but with the most suspicious attention. It comes from an order of men, whose interest is never exactly the same with that of the public, who have generally an interest to deceive and even to oppress the public, and who accordingly have, upon many occasions, both deceived and oppressed it.

(Emphasis added.)

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Fukushima's Spent Fuel Pool

Fukushima’s Spent Fuel Pool

Tokyo Electric Power Company has started a year-long operation to remove more than 1,500 spent fuel rods assemblies from a damaged cooling pool with radiation thousands of times higher than normal:

Fukushima: Dangerous operation of removing fuel rods begins | Nuclear Energy Insider.

Unlike Las Vegas, what happens in Fukushima will not stay in Fukushima, but will affect public perceptions of both nuclear power and nuclear accident remediation everywhere.

Here’s hoping this will go as smoothly as possible.

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Clinton Nuclear Plant

Clinton Nuclear Plant

The Sparkspread earlier discussed one of ComEd’s main business objectives in the early 2000s, which it largely achieved: Strip the generating assets out of the regulated public utility, which would then become just a “wires” (i.e., transmission and distribution) business, by transferring them to an unregulated affiliate that could sell the power and energy in the open market.

Before 2000, when those generation assets were held by ComEd and subject to state regulatory limits, the utility was unable to take full advantage of higher prices in the wholesale electricity market. The Illinois Commerce Commission approved the transfer of ComEd’s nuclear generating stations to Exelon Genco, n/k/a Exelon Generation. ComEd didn’t get any cash out of that deal, but ComEd’s witnesses testified that the real benefit to ComEd was that it could lay off the entire risk of the generation side of the business on Exelon Generation:

While, as the [Illinois Commerce] Commission notes, the [t]ransfer [of the nuclear generating stations to Exelon Generation] will reduce the level of  “hard assets” on [ComEd’s] books, it is far more significant from a lender’s credit-assessment perspective that the [t]ransfer will greatly reduce ComEd’s generation-related default risk.” (Ill. C.C. Docket No. 00-0244,  Supplemental Direct Testimony of R. McDonald, pg. 4, lines 82-84).

The risks associated with competition are likely to make the default risk of a debt investment in a generation business greater than the default risk associated with a debt investment in a wires business (transmission and distribution). Ill. C.C. Docket No. 00-0244, Supplemental Direct Testimony of R. McDonald, pg. 5, lines 95-97.

In particular, the [credit rating] agencies’ general assessment is that companies electing to focus on generation will need higher cash flow coverages and stronger capitalization ratios (i.e., more equity) to maintain the same debt rating as the generation market becomes more competitive. Ill. C.C. Docket No. 00-0244, Supplemental Direct Testimony of R. McDonald, pg. 5, lines 107-110.

Exelon Generation, nuke plant operator, got the opportunity to make more money for its parent company, Exelon Corp. But as this testimony shows, Exelon Generation knew the job was dangerous when it took it. Selling power in a competitive market is riskier than getting a regulated rate of return on your assets, and that gave Exelon Generation a higher risk of default.

According to Crain’s Chicago Business, at a November 2013 meeting of the Edison Electric Institute in Orlando, Exelon CEO Chris Crane said that Exelon will close its Quad Cities and Clinton nuclear stations, both of which are money-losers in the current, long-running slump in electricity prices, if the price of power doesn’t go up enough to compensate it for running them. That makes perfect sense and demonstrates the market’s power for creative destruction.

What’s more troubling is the alternative that Exelon’s CEO offered as a way to keep Quad Cities and Clinton running. Exelon may try to push another ComEd bill through the Illinois General Assembly that would compel ratepayers to pay an above-market electricity price under a long-term contract with ComEd so that Exelon won’t have to close those two stations.

There’s a problem here. Exelon’s market-based plan from the early 2000s miscarried, principally because of the shale gas revolution and the Great Recession. The former increased supply, while the latter decreased demand. Econ 101 tells us what that does to the price of the commodity being sold.

Contrary to Mr. Crane’s assertions, the continued low price for electricity does not  represent a flaw in the market. Indeed, setting aside manipulation and other externalities, our era’s secular orthodoxy is that the market can’t be wrong because, well, it’s The Market. Its infallibility exceeds that of Pope Francis speaking ex cathedra.

As ComEd’s testimony from 2000 shows, in choosing to go into the power generating business Exelon Generation expressly and knowingly assumed the risk of debt default, a consequence far more grave than the need to close one or two nukes because they’re not profitable. It doesn’t suit Exelon’s CEO to complain about a wholesale electricity market of which his company was the primary author. Had electricity prices gone the other way, Mr. Crane would be defending that same market with equal vigor.

Exelon compounds its offense of questioning the market by suggesting that Illinois ratepayers subsidize its generation business by paying above-market prices under a long-term agreement with ComEd. This is corporate welfare of the first order.

Assuming that Crane does push to get this corporate welfare for Exelon Generation, he’ll find that there’s toothpaste spread all over Illinois that he’ll have to put back in the tube. The Illinois retail electricity market has been competitive for more than ten years. The  vast majority of nonresidential customers are already served under competitive supply contracts, and most of these are in customer classes already declared competitive, meaning that if they did migrate back to ComEd they’d be eligible only for hourly rate supply service. The benefit to Exelon Generation of their return to ComEd would therefore be precisely nil.

As for residential customers, the growth of municipal aggregation over the last two to three years has far exceeded anyone’s expectations when those provisions were written into the law, so much so that the Illinois Power Agency did no electricity supply procurement for ComEd for the 2013 planning year. That may change in the future as ComEd’s current supply contracts wind down, and new ComEd contracts begin to reflect current, lower market prices. But Exelon ought not to discount the determination of the current crop of municipal aggregation suppliers to hold on to their customers, and those suppliers will have access to the same low-price wholesale market.  So, assuming that Exelon and ComEd do eventually execute a long-term, above-market supply contract, there remains a substantial question as to whether the supply volume under that contract would be large enough to make any difference in the net revenues of Exelon Generation. Indeed, Crane’s corporate welfare quest carries within it the seed of its own destruction: The greater the corporate welfare Exelon seeks, the higher above market the proposed long-term contract price will be, and therefore the less likely that customers will migrate back to ComEd.

One suspects that Mr. Crane’s corporate welfare plea was not fully thought out.

But if Mr. Crane is serious about long-term, above-market contracts with ComEd, any legislative package will have to effect some limits, or even reversals, of Illinois’ current competitive retail market. Alternative retail electric suppliers should be watching Exelon like hawks over the next few months.

Apart from the upside-down economics of Mr. Crane’s corporate welfare plea, Exelon will confront another, far more significant obstacle: optics. We’ll be treated to the spectacle of Exelon seeking corporate welfare from the General Assembly within a few months of its vote to cut pensions to retired public employees, and even closer to Congress’s termination of support for the long-term unemployed. Retired schoolteachers in Illinois will not only get less money each month from their reduced pensions, but they will have to pay more of what they do get to ComEd so that its affiliate, Exelon Generation, may be spared the vicissitudes of the free market that Exelon itself ushered in.

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