Thirty-two-year-old Sam Insull didn't expect to like Chicago much when he took over the Chicago Edison Company in 1892. He'd been here on business trips before, as Thomas Edison's secretary and financial adviser. The place lacked polish: What else could you say when the prime evening recreation at the Sherman House was to sit on the porch and lay bets on how many rats would emerge from the sewers at Randolph and Clark streets?
Nevertheless, Insull--never one to do things by halves--accepted a cut in salary, came to Chicago, borrowed a cool quarter million from Marshall Field, and set about his life's work. In the next few years, he conceived the pattern from which all modern electric utilities are constructed, and built Commonwealth Edison Company to fit it; he conceived the pattern from which modern state regulatory commissions are constructed, and built the Illinois Commerce Commission to fit it.
Insull's bright idea--which he was almost alone in espousing in 1898--saved investor-owned utilities from cutthroat competition and municipal grafters on one hand, and from government ownership on the other. He argued that providing electricity should be neither a competitive business nor a municipal service. Instead, it should be a monopoly, with capitalists making a profit, and the state protecting consumers.
Within this cozy framework, Insull did for electricity what Henry Ford later did for the automobile: made buckets of money by selling an elite product cheap to a mass market. First, Insull and his successors would entice customers to use more electricity by cutting prices and promoting appliances. (Edison salesmen peddled electric fans door-to-door during the summer. In 1908, company canvassers passed out 10,000 General Electric irons for housewives to use, free, for six months.) Then they'd scramble frantically to build ever larger power plants in order to be able to meet the increased demand and cut prices still further. Edison's rates dropped without interruption from 1892 to 1954, and did not begin to rise significantly until the 1970s, when inflating interest, construction, and fuel costs outpaced economies of scale.
But once the price of electricity began rising, Edison's customers quit playing that game of leapfrog. They increased their use of power at less than 1 percent a year, instead of the historic 7 percent. The company kept on building--so enthusiastically that its rates have doubled since 1978. Worse is in prospect, since it has spent over $7 billion on a trio of nuclear power plants whose power it won't need for five years at the very least--Byron 2, near Rockford, and Braidwood 1 and 2, southwest of Joliet. The firm will soon be able to generate 22,521,000 kilowatts at one time, but the most its customers have ever used (July 17, 1986) was 15,499,000.
Insull's compromise worked so well once--but now, when we are about to have 45 percent more electricity than we can use, the price keeps going up! No wonder Com Ed finds itself on the defensive before the Illinois Commerce Commission (where every request for a rate increase is a battle royal), in the courts (for example, the Illinois Supreme Court, which will soon review a half-billion-dollar refund and reaudit ordered by Circuit Court Judge Richard Curry), in Springfield (where the General Assembly in 1985 passed a new, un-Insull-ated Public Utilities Act over Edison's objections), in the media, and in boardrooms and city halls across northern Illinois (where those able to do so are seriously considering moving out, buying their electricity elsewhere, or making their own). Something has gone very wrong. As the California-based Reason Foundation recently commented, "What is really at issue in the current controversy over Commonwealth Edison rates is the entire structure and justification for public utility regulation."
For the first time in three generations, the question of where and how and from whom we buy electricity is up for grabs. Insull's successors are doing their best to make sure nobody grabs it from them. So on December 19, 1986, Illinois Governor James Thompson and Attorney General Neil Hartigan, and Cook County State's Attorney Richard M. Daley converged on the State of Illinois Center--the site of the old Sherman House--to announce a novel Com Ed-hatched scheme to save the company and its customers from each other.
Com Ed is not your classic picture of a company in trouble. Its 1986 profit margin was 19.2 percent of sales--the highest of any publicly held company in the Chicago area, according to Crain's Chicago Business. Since 1982, its earnings per share have increased steadily from $3.75 to $4.69. But in these same five years, the utility's political and economic maneuvering room has drastically shrunk. It now has so little space to move that even if it were to win a few more standard rate cases, it would probably lose so many large customers it would descend into the "death spiral," of which more later. There are limits to how much even a monopoly can charge.
Electricity in northern Illinois now costs about one-third more than the national average, according to Chicago's Center for Neighborhood Technology. Assuming Com Ed "victories" under traditional cost-plus rate making, by 1995 its electricity would cost almost double the national average--all because the utility has unrelentingly continued to pursue the nation's most ambitious nuclear construction program. Even after 1980, when it became increasingly clear that consumers were committed to conserving and that continuing to build risked the kind of trouble we see today, Com Ed persisted. According to author Richard Munson (The Power Makers), U.S. utilities canceled plans for 180 power plants between 1973 and 1985. If Edison had rolled with the punches as other utilities did and dumped two or three of its nukes, there would be no outraged consumers, no settlement agreement, and no story.
Com Ed's plan, more sweeping than anything the state could require it to do, has been called a "settlement agreement"--even though several of the groups supposedly being settled with refuse to agree to it. It provides that:
Com Ed can finish its last three nukes, and then turn them over to a wholly owned subsidiary from which it can buy electricity if and when it needs any.
The subsidiary can sell the three Bs' (the Byron and two Braidwood plants') kilowatts wherever it can find a market. As a wholesaler of electricity, it will no longer be regulated by the Illinois Commerce Commission but by the Federal Energy Regulatory Commission (FERC).
Com Ed will not ask the ICC for the gargantuan rate increase of 29 percent or more to which it might have been entitled if it had kept the plants. Instead, it will content itself with a merely enormous 9.6 percent boost--with which it will pay its subsidiary $55 million a month for the right to buy power. After that its rates will be frozen, barring emergency, for five and possibly eight years. Hence both Com Ed's description of the settlement as a "rate freeze plan" and consumer groups' description of it as a "rate hike plan." (The rate increase is cleverly combined with a reduction in the unpopular summer-winter rate differential, so that if it is implemented when Com Ed insists (July 1), it will first be felt as a rate reduction. The increase will hit months later, when the formerly cheaper winter rates jump.)
One last fillip: all pending cases that might cost Com Ed money must be dropped or otherwise resolved in the utility's favor. No refunds, no audits, no inquiries into excess capacity--nothing.
Other states have seen proposed rate freezes and spin-offs of problematic plants, but, says Illinois Public Counsel Stephen Moore, "nothing of this detail or magnitude. Everything about this is the biggest, largest, longest."
It is a way of supplying electricity that is radically different from the way Sam Insull--or any of his successors until quite recently--would have espoused. Electric utilities normally get set by a cost-plus mechanism (familiar to students of military procurement contracts and simple in outline, if not in execution): First, find out how much a utility's power plants, power lines, and miscellaneous hardware are worth--the "rate base." Then, find out how much profit the company needs to make in order to attract investors--the percentage "rate of return." Multiply one by the other (with adjustments for fuel and labor costs), and presto: northern Illinois' electric bill for the year, which can now be apportioned among different kinds of customers.
This oversimplified model is accurate enough to explain how electricity prices can rise even when there's too much: Com Ed claims the legal right to put each of its new plants "into rate base" as it is finished. So the product of rate of return and rate base leaps upward every time a new plant appears; and if the ICC (and, originally, Com Ed) made the mistake of OK'ing too many power plants, that total revenue amount will have no more kilowatts to be spread over. Cost-plus.
But now Com Ed offers to move a piece of itself out from under the protection of cost-plus and into the open market. If the company is right and it can sell those extra kilowatts in other states, its shareholders will profit; if it's wrong and it can't, the shareholders will take a bath. (But only a sponge bath. The subsidiary will not be fully exposed to the market. It is guaranteed $660 million a year from its parent, and it will be regulated, albeit leniently, by the FERC.)
In days gone by, decisions of the Illinois Commerce Commission have served to clothe Com Ed's own programs with the legal armor of the state of Illinois. Com Ed made the plans, the ICC approved them. The company frequently refers to the ICC's "ordering" it to complete its Braidwood and Byron plants--legally true but factually obtuse, since the company did everything it could to obtain that order. Now, all of a sudden, Com Ed views the ICC's forthcoming decisions on rates and plant cancellations as "uncertain," "costly," and sources of protracted litigation. No longer does it want to be a natural monopoly sheltered by the state; now a bit of competition looks better than cost-plus.
Why even make such a proposal? Some observers think Com Ed is desperate, and they point to five recent political and economic changes boxing the company in.
(1) Harold Washington. Commonwealth Edison had good friends in City Hall since at least the election of William Hale "Big Bill" Thompson in 1915--until 1983. Now the mayor represents a constituency that views the utility with deep mistrust, and compares the company's plan to a cardsharp operation.
The people in City Hall today contend seriously against Edison in the ICC and in court. They are adding generators to the northwest incinerator that are expected to save the city $500,000 a year in electric bills. And they are already deep into planning for hard-nosed negotiations over Edison's franchise to operate in Chicago, which expires December 31, 1990.
(2) CUB. At the vigorous behest of Patrick Quinn (then legislative gadfly, now city revenue director!) and others, Illinois legislators in 1983 authorized the nongovernmental Citizens Utility Board, which could recruit its members by having its propaganda mailed in the same envelopes as utility bills. CUB exists in part because the Springfield establishment feared a more radical proposal to make the Illinois Commerce Commission elective. The advocacy group now has about 150,000 dues-paying members and a knowledgeable staff, which helped shift the balance of power before the ICC toward the perennially outspent consumer advocates.
(3) New Public Utilities Act. In 1985, after two years' staff work and 100 hours of hearings, a joint committee of the state legislature chaired by moderate Republican (now Congressman) Dennis Hastert agreed on a thorough revision of the state's 60-year-old, Insull-written public utility law. It included mandatory outside audits of power-plant construction, ICC energy planning and a better-organized staff to do it, a new Office of Public Counsel to help represent consumers, a ceiling on excess generating capacity, more court authority to oversee ICC decisions, and a no-revolving-door provision forbidding ex-commissioners to dabble in ICC business within a year after their departure.
When Com Ed failed to kill the bill outright in the state senate, it narrowed its focus to the excess-capacity clause and pulled out all the stops. "They spent hours of employees' time telling them what a disaster it would be, and giving them form letters to send," recalls CUB executive director Susan Stewart. "Some came in reading, 'Dear your representative.' They sent $9.75 express-mail letters to all their retirees, and postcards to their shareholders. It was an astounding paper blitz." The excess-capacity ceiling fell. The rest of the bill, however, made it into law, an unlikely outcome had Chicago Democrats still been looking out for Com Ed's interests in Springfield. Com Ed describes the new act as a compromise; other observers view it as probably the firm's worst defeat in a legislative forum.
(4) The "new" Illinois Commerce Commission. The ICC has never been Com Ed's (or anyone else's) rubber stamp, but it's been close. Until quite recently, it had roughly 60 percent of the funding of other state commissions with a comparable work load--meaning it often had to rely on the numbers provided to it, often by utilities. A November 1985 Merrill Lynch report rated the ICC as the state regulatory commission most favorable to utilities. Governor Thompson's December 1985 choice of Mary Bushnell to chair the ICC signaled a change. Last July, in an unprecedented action, the ICC put the burden of proof on Edison to show why its Braidwood 2 plant should not be canceled. In December, when Edison managers refused to negotiate the terms of the settlement agreement, Bushnell called them "silly" and "arrogant."
(5) The Death Spiral. Insull's money machine can run backwards, a phenomenon far more dangerous than a genuinely independent ICC. It's simple economics: the more you pay for your electricity, the more incentive you have to buy from someone else, to produce your own, or to substitute other energy sources altogether. And the more people do that, the more electricity will cost the rest. It's a vicious circle. Edison is still a state-protected monopoly, but at its edges it is vulnerable, and those edges are getting more vulnerable all the time.
Insull's old competitor, gas, is making a comeback; Presidential Towers is the first new high rise to use gas heat in years. Industries, especially electricity-intensive ones like steel, have a powerful incentive to move away or at least do their expanding elsewhere. (A January 1986 poll of small businesses reported in Crain's showed Illinois respondents ranked electric rates as their number-two problem, ahead of liability insurance and workers' compensation; outside of Illinois it was only sixth.) To hold on to these customers, Com Ed offers a lower "job protection rate" for industrial customers who expand, and now it's trying to lure back those firms that have been generating their own electricity with a cut from 5.8 cents to 3.6 cents per kilowatt hour.
The most famous domino to fall in this department has been the small Kane County suburb of Geneva, which in May 1985 began buying electricity wholesale from Wisconsin Electric Power at a little over 5 cents per kilowatt hour, instead of Com Ed's 8 cents. But even before Geneva made its move, the Illinois Municipal Electric Agency--a cooperative power supplier established in 1984 after a three-year legislative struggle against you-know-who--began brokering electricity for a few towns too, giving them a real chance to buy wherever they could find the best deal.
Geneva and the IMEA customers could do this only because, unlike most towns and cities, they own their own electric distribution lines, and thus can retail electricity to residents. (Chicagoans and most other northern Illinoisans buy direct from Com Ed at retail.) Geneva also first had to beat Com Ed in FERC proceedings, forcing the utility to cut by two-thirds its charge for transmitting electricity from Wisconsin to the town.
Other towns have not rushed to Wisconsin or to IMEA because Com Ed has moved aggressively to keep their business, by cutting rates almost in half, outmaneuvering IMEA on contract expiration dates, and (in the cases of Naperville, Saint Charles, and Batavia) locking in ten-year contracts.
Cheaper electricity--wow! A great victory, right? Not for the rest of us. The same size rate base must earn the same rate return, regardless of the number of customers. It's like a water balloon: if Geneva and Naperville squeeze it in one place, you can be sure it will bulge out in another. Whether towns and industries leave Com Ed's system altogether, or whether they get lower rates by making the threat, the effect is the same: everyone else pays more.
No one knows exactly how many squeezes the Commonwealth Edison water balloon can take before the process gets out of hand. But if it did, then Sam Insull's vision of cheap, centrally generated electric power would be turned inside out: everyone who could would run their own power plant, while a pitiful helpless giant of a utility served only those who couldn't escape the crushing rates--mostly small businesses and residents of towns that don't own their own poles and lines.
Com Ed has more immediate reasons to be desperate, if it is. The company has never been closer to losing so many simultaneous regulatory battles. It could still win them one by one, but the settlement agreement, if approved, would wipe the slate clean. A sampling:
(1) Braidwood 2 cancellation. On July 2, the ICC ordered Com Ed to show why the commission should not cancel this last nuke--a dramatic shift from its previous holdings that it should be finished. The plant is somewhere around 90 percent complete, but Doug Cassel, attorney for Business and Professional People for the Public Interest, argues that consumers would still save if the utility mothballed it. Such a course would not be cheaper for Com Ed shareholders: there's no profit in an inactive plant, and Com Ed would have to fight with the ICC just to get its costs back. Governor Thompson endorsed cancellation during the fall campaign.
(2) LaSalle 1 refund. An ICC hearing examiner has recommended that the commission order Com Ed to refund $70 million to consumers, because this reactor was shut down for two-thirds of the first year Com Ed had it included in the rate base.
(3) Byron 1 refund. Cook County Circuit Judge Richard Curry overruled the Commerce Commission, described its regulatory process as "all form and no substance . . . fishing without worms," and ordered a $500 million refund to consumers and a new audit of construction practices at the Byron 1 plant. Com Ed got the refund postponed on appeal, and the case is now awaiting state Supreme Court action. The decision could come down at any time, and Com Ed says that if it loses the settlement agreement is dead.
(4) Byron 2 and Braidwood 1 audits. As required by the new Public Utilities Act, outside auditors are checking to see if the plants' sizable cost overruns are due to mismanagement or were unavoidable. Com Ed objected vigorously to the ICC's choice of auditing firm. Under the settlement agreement, these reactors would be part of the subsidiary and no longer under ICC regulation--and the audits would be deep-sixed.
(5) There are six other ICC cases, including one that might cut Com Ed rates because of the new federal tax law and another that might limit its right to earn profits on new plants considered "excess capacity."
Against this background, the Com Ed/Thompson/Hartigan/Daley announcement December 19 was a master political stroke. Hartigan and Thompson are often at odds with Com Ed, and with each other. Now the company gave, or appeared to give, enough ground to bring together big business and big labor, the state's top Democrat and top Republican, all to endorse . . . an electricity rate increase!
On the other hand, those unwilling to sign on--Mayor Washington, the Metropolitan Sanitary District (Com Ed's second-largest customer), State Treasurer Jerome Cosentino, CUB, BPI, the Illinois Public Action Council, the Labor Coalition on Public Utilities, National Peoples Action, and a number of community organizations--found themselves isolated, forced into the unstatesmanlike posture of seeming to perpetuate the state's endless, and endlessly predictable, utility wars.
It was a big surprise, but it shouldn't have been: Com Ed has a history of springing surprises when seemingly cornered. It has to; unlike Sears or General Motors, it can't move away. Sam Insull might not appreciate the substance of the settlement agreement, but he would feel right at home with the jujitsu by which the cornered became the cornerer.
In 1897, the gang of thieving aldermen known as the "Gray Wolves," led by Roger Sullivan and John Hopkins, chose Insull and Chicago Edison as their prey. Edison was not yet a monopoly--indeed, it couldn't be assured of becoming one, because city councils granted utility franchises to most comers--but it looked rich enough for a shakedown. The Wolves threatened to set up their own electric company, and grant it a 50-year citywide franchise--something Edison didn't have--if Insull didn't buy them off. (In 1895 the gang had realized over $7 million from Peoples Gas in a similar scam.) Insull refused. Sullivan and Hopkins went ahead and established Commonwealth Electric Company and voted it a 50-year franchise. Insull still wouldn't budge. Puzzled but confident, the Wolves called his bluff, began turning their dummy into a real utility--and discovered that "Insull had quietly acquired the exclusive rights to buy the electrical equipment of every American manufacturer," according to Insull biographer Forrest McDonald. "Commonwealth could hold its franchise for eternity but could never light a single bulb. After four months the politicians capitulated and sold Commonwealth and its franchise to Chicago Edison for $50,000." Insull now had the only electric utility franchise in the state longer than 20 years. In 1907 he merged the two firms and that's how we got the Commonwealth in Commonwealth Edison.
The list goes on: in 1905-6, at the height of the clamor for city ownership of utilities, Insull announced a rate cut, and then offered to make another if the City Council would approve the merger of Chicago Edison and Commonwealth Electric. The council did, but Mayor Edward F. Dunne took it as a personal rebuke and vetoed the bill--whereupon Insull agreed to make the second rate cut anyway. An embarrassed Dunne called in New York accountants in hopes of proving Insull should have lowered rates even further, but they found nothing of the sort.
By 1911, Insull was delivering electricity to more than 100 different communities, each free to negotiate a separate franchise with separate rates. He wanted a state commission to simplify and standardize this mess, but rather than advocate one directly he worked behind the scenes, testifying privately to a committee and lobbying through his friends (Gray Wolf Roger Sullivan now among them). He got the state Public Utility Commission he wanted, all except for open-ended franchises. When the public became frustrated with the PUC and politicians in 1920 began campaigning against it, Insull maneuvered so that the PUC was abolished with great fanfare. Later in the legislative session, the Illinois Commerce Commission was created with the same power to set rates and terms of service. (This is the law Commonwealth Edison claimed needed no revision in 1985.)
Even in later, quieter years, Com Ed continued to show that same flourish. In 1956, when the utility was ready to start work on the country's first privately financed commercial nuclear power plant (Dresden 1), Congress failed to pass a law limiting the company's liability in case of a reactor accident. The company went right ahead with the project, as John Hogan writes, "confident that Congress would solve the problem in 1957." It did--by passing the Price-Anderson Act.
But let's be fair. Just because Com Ed has pulled some fancy maneuvers in the past doesn't mean its current proposal is a bad deal. Unfortunately, it's almost impossible to be sure. To evaluate the settlement agreement on its merits you have to make dozens of imponderable assumptions: which cases would consumers win? by how much? would the new ICC allow all, part, or none of the three Bs into the rate base--and how would the courts rule? how fast would electricity demand grow? would the new plants operate as efficiently as Byron 1 has or as inefficiently as LaSalle 1 did? And so on.
One shortcut--not infallible, but revealing--is to look at how the plan was developed and presented. If the plan is being railroaded through, we have to wonder whether it's such a good deal for all concerned.
Com Ed claims it has been open and reasonable all the way: it first dealt with the most representative elected officials, and then was in the process of consulting with consumer advocates when a leak forced premature disclosure of the plan. But even after that, they say they were always willing to negotiate everything about the settlement agreement except the price (rate hike). Unfortunately, very little of this story will withstand close examination.
"Their plan was to get this on a fast-moving train and get it done," says CUB executive director Susan Stewart. "They didn't talk to anybody they thought would be opposed until the 11th hour." Howard Learner, CUB's president and an attorney for BPI, elaborates: "It's no secret who you need to talk to, if your goal is to reach a meaningful settlement. Lawyers do it all the time: you call up all the parties on the brief, bring them into a room, and hammer out an accord.
"At any time in late 1986, Com Ed could have called up the key groups and said, "We'd like to reach a settlement.' That is not what happened. Com Ed and the politicos cooked this up in the back room, starting sometime last August." From Learner's standpoint, this is no more a "settlement agreement" than there would be if Larry and Moe "agreed" that Curly would treat them all to a fancy restaurant, and told him as they were going in the door.
"If we had brought all the groups in first, we never would have gotten anywhere," says Com Ed's John Hogan. (There would have been about 13 governmental and consumer groups.) Since "discussions have to start somewhere," adds CE vice president and general counsel Harlan Dellsy, "we thought it was appropriate that they start with the people publicly charged with those responsibilities."
"We've never viewed the consumer groups as coequals with the governor or the attorney general or the state's attorney," says Hogan. "First, the public officials have been involved in these matters going back many years before CUB was ever created. Second, they were elected by all the people, whereas Howard Learner claims to represent a certain number of people, which we've never been able to verify."
This hardly sounds like the attitude of someone seeking a settlement of a difficult case, or bunch of cases, mutually agreeable to all the parties. It is a peculiarity of the American legal system that before the law all are coequals: the scruffiest deadbeat has neither more nor less standing than a four-term governor. As ICC chairman Mary Bushnell told the Tribune December 23, "These groups have legal remedies, and no one, no matter who they are, can make them drop their suit."
And given the logic of starting with elected officials, it is hard for Com Ed to explain why Richard Daley qualifies while Harold Washington doesn't. (If anyone I talked to thought Daley was an important player in the negotiations, they didn't say so. Patrick Giordano, supervisor of the state's attorney's public utilities division, declined to be interviewed.)
Com Ed says the agreement went public earlier than planned because someone leaked it to the press. The company was in the midst of contacting consumer groups as the skeptical and critical quotes began to pile up in the Sun-Times and Tribune. "We thought the leak might be sufficient to kill the proposal," says Jeff Miller, director of Governor Thompson's office of planning. "It was important for us to step out."
Step out they did on Friday, December 19, but not in a way that lends much credence to the theory that they were endorsing a concept just halfway negotiated. "The agreement we're announcing today is a sensible, realistic solution," said Thompson. "This is a good proposal," added Hartigan. "It is a tremendous victory for consumers." "Fair and reasonable," echoed Daley. Not until the 17th paragraph of their joint press release did they mention the allegedly interrupted negotiations. This paragraph reads, in full: "The Attorney General and representatives from the Governor's and State's Attorney's offices will continue to meet with consumer groups to gain their support of the plan." Not "to flesh out what looks to us like a good concept." Not even "to modify inconsequential details of this great plan." Simply "to gain their support" for a done deal.
Commonwealth Edison now says it always was willing to negotiate on every part of the agreement except its need for a $660 million rate increase before the freeze. But Howard Learner's recollection of the December 17 meeting between himself, Doug Cassel, and Alexander Polikoff of BPI and Com Ed CEO James O'Connor and a Com Ed attorney is different. "They told us it's a fait accompli, take it or leave it in 24 hours."
Replies John Hogan, "I can't imagine Jim O'Connor using that kind of language. It's just not his style." Perhaps not, but it is certainly consistent with Edison's rhetoric during the next week. The company made no complaints when the Tribune's Mark Eissman repeatedly quoted its spokesmen's intransigent statements. "The agreement is not negotiable," said vice president George Rifakes. "The agreement is not negotiable; that's the way it was put together. That doesn't mean we won't talk to people, and have, but changing the terms of the agreement, no. We've given our absolute best on this agreement now and we just can't change it." Added Hogan at the time, "We would likely withdraw the agreement, rather than reopen it and start trying to put it together again." Only after a week during which Hartigan pressed for a 30-day talking period, three ICC commissioners hinted that a nonnegotiable deal stood little chance of approval, and consumer advocates began lining up against it, did Com Ed on December 26 back down and agree to talks that lasted 47 days. (Followers of the late Chicago world's fair for 1992 may see some similarities in style between this effort and that one, not too surprising since Commonwealth Edison officials were prominent in the fair push. They didn't seem to understand the new politics then, either. When Mayor Washington in 1983 asked for more public participation in fair planning, prime mover and retired Edison CEO Thomas Ayers responded, "Well, we intend to work to have more neighborhood participation. And we think this is a good idea. This is not a bad idea. This is a good idea. One of the things we hope to do is have the neighborhoods have many activities during the time all these people are visiting the city."
(And just as the mockingly named Chicago 1992 Committee questioned the fair, community groups are forming the mockingly acronymed Fair Electric Rates Coalition [also FERC] to oppose the settlement plan.)
Both sides made concessions during the unprecedented and grueling negotiations that followed, but talks broke down when Com Ed refused to lower its 9.6 percent rate increase. Even so, the agreement that Com Ed and the politicians took to the ICC February 4 was considerably more detailed and balanced than the version endorsed and publicized by Thompson, Hartigan, and Daley on December 19. The February 4 version includes provisions for emergency rate decreases during the five-year freeze period in the unlikely event of a Com Ed windfall, and it no longer includes the infamous "cheerleader clause," in which signers would agree "not to . . . urge upon the General Assembly . . . any action inconsistent with the effectuation of the terms of this memorandum."
CUB's negotiators had had trouble figuring out what this would allow them to do. Could they, for instance, ask lawmakers to come up with a new funding mechanism for CUB, now that the utilities have succeeded in court in getting CUB flyers out of their bills. Oh no, said Edison, that would breach the agreement. Well, if an action so remote from the specifics of the settlement could render it null and void, what could CUB do? CUB's Susan Stewart says the answer that came back from Com Ed was: "Every time you want to introduce legislation, just come to us and ask."
Com Ed now tells the ICC not to meddle with the settlement plan it has submitted--just vote it up or down, and do so before May 1, so the rates can go into effect July 1.
To Stewart, this is an astonishing display of arrogance: "My God, the ICC has taken five years to decide whether to cancel Braidwood 2. There is no way in hell you can set rates for the next 30 years by May 1." But the commission has so far agreed to run its railroad on Com Ed's schedule, suspending the Braidwood cancellation and LaSalle refund cases, and consolidating others into the settlement hearings. CUB has moved to dismiss the settlement agreement on this ground alone. "CECo requests that the Commission resolve the pending dockets . . . not on the basis of a full and fair hearing, but rather on the basis of an agreement to which several of the pending litigants are not parties," it told the ICC February 10, and on a schedule "that simply cannot accommodate a full and fair hearing on the many complex issues raised by those dockets."
Com Ed's Harlan Dellsy views due process a bit differently. "We're trying to avoid getting trapped in procedures here," he told me. "When all is said and done, my understanding is that due process is supposed to be tied to reasonableness and fairness--not to lawyers' convenience or doing things as they've always been done. Nobody is saying there will be no testimony, no chance to cross-examine or to offer testimony of their own. Courts and other agencies conduct due-process matters on much faster schedules all the time."
It could still be a good deal, though. "One of the things the general always mentions about this," says First Assistant Attorney General Michael Hayes, referring to Hartigan, "is that if Commonwealth Edison had made a traditional rate filing, and the ICC after 11 months had said, "It's too high, you can only have 9.6 percent,' this would be viewed as the greatest consumer victory since sliced bread."
Consider: it's 9.6 percent with a five-year freeze; Com Ed writes off $550 million of its investment in the three Bs, a figure roughly equal to what some think the pending construction audits required under the new Public Utilities Act might disallow. The plants never go into the rate base, so consumers won't have to pay extra for cost overruns or unneeded electrical generating capacity. But the plants are built, so consumers can get the power if it turns out they do need it after all.
Hayes finds the consumer groups' negotiating positions unrealistic and self-contradictory. "They would start with the premise, "We're negotiating as if these three plants aren't there.' But they are, they were ordered to be built, and they're ready to produce." He was nonplussed to find the same groups that had proclaimed Braidwood 2 unnecessary were spending hours negotiating ways to guarantee that Com Ed could buy its power.
"If the private consumer groups claim they can get the cost of these three totally out of the rate base, have the power available if needed, for no rate increase, then they're offering what our consumer fraud division tells you to look out for: if a deal seems too good to be true, it is."
Hayes's former allies think the settlement agreement itself is too good to be true. They think it gives Com Ed too many chances to raise rates during the freeze period and to recover costs afterwards. They worry that the Federal Energy Regulatory Commission may move in and override some of the agreement's provisions, as the agency has done in a somewhat similar case in Mississippi. They don't like seeing the playing field changed just as they began to have a chance, by having the three Bs switched from under the nose of the inquisitive new ICC and the state's tough new Public Utilities Act to the comparatively lenient regulation of the FERC. (Along with the Federal Communications Commission, FERC is the only regulatory body in the country that Merrill Lynch rates as more pro-utility-stockholder than the old ICC.)
And the consumer advocates regard with derision Governor Thompson's repeated claims that five years of rate stability will be a useful economic development tool for northern Illinois. Com Ed electricity is already the second highest priced in the midwest, and plopping almost another 10 percent on top of that won't help matters, especially since neighboring utilities that got off the construction merry-go-round long ago are reducing their rates. This fact appears to have escaped general notice--Hayes greeted it with a skeptical guffaw--but in the past year more than 20 electric utility rate reductions and half a dozen refunds have been ordered in 22 states, among them Wisconsin, Michigan, Indiana, and Missouri.
Because they keep carping and refuse to get on board, it's easy to accuse the consumer advocates of bad faith. In a February 9 editorial, Crain's Chicago Business singled out CUB as a group of "reform-minded zealots" that refuses to accept a good deal because it needs Commonwealth Edison as an enemy. (The attorney general's staffers agree.) Susan Stewart, predictably, denies the charge. "There are other utilities in the state," she notes sardonically. "Our problem is too little money, not too little work." Less predictably, she offers evidence: "Just eight months ago, with the attorney general, we negotiated a compromise with Illinois Bell. We were pivotal in those negotiations, and we've taken some heat for them because some people's bills will be higher under that plan."
Com Ed has been accused of bad faith, too. Some think the whole settlement proposal, with all its complexities, is largely a ploy to gum up the Braidwood cancellation case and the Supreme Court refund case, and in effect win them by delay. The ICC has allowed Braidwood 2 construction to proceed while it considers the settlement agreement, even though every passing month means Com Ed has sunk another $71 million into it and come that much closer to completion. And the pending settlement certainly muted the voices of the governor and attorney general when the Byron 1 case was argued before the Supreme Court on January 28. Edison spokesmen point out, however, that delay also works against the company, since it might otherwise have filed a regular rate increase during this time.
And there's still the notion that Com Ed is desperate, sees it's losing, and wants to change games. "None of this crap would have happened," says Susan Stewart, "if Edison wasn't up against the wall in a lot of forums." Com Ed's Harlan Dellsy, on the other hand, still insists the company could do better than the settlement if it fought it out. But Com Ed knows perfectly well that if it wins everything it could in theory get from the ICC, it could set off the death spiral and lose.
"We're not totally insensitive clods," says Dellsy. "We understood there had to be a better way. We can't pick up and go to the southwest or the southeast. If we can participate in something that's good, long-term, for the economy of our area, then we view it as worthwhile to take less than the law says we can claim in the short run.
"Besides, peace is worth something to all of us, too--peace and stability and being known as an area that can solve a thorny problem and get on with other things." Adds Hogan, "We've seen what Council Wars has done to Chicago's image politically. We don't need a sequel to that in the business arena."
But they've already got it.
Art accompanying story in printed newspaper (not available in this archive): illustration/Carl Kock.