Post # 43 - Blow to ComEd's Smart Grid Program in Illinois

In another potential check to smart grid development, an Illinois state appellate court last week placed a major economic hurdle in the path of Chicago-based Commonwealth Edison Company's smart meter program. Like similar cases before public utility commissions in other states (e.g., Maryland, Hawaii and Ohio), the issue was who should bear the initial cost of smart meter installation and implementation. In ComEd’s case, the utility actually won at the PUC level but lost (for now, at least) at the court house.

Last fall, ComEd received approval from the Illinois Commerce Commission for a one-year Advanced Metering (AMI) Infrastructure pilot – i.e., a smart meter pilot program. The pilot involved the installation of over 130,000 smart meters in nine towns in the Chicago metropolitan area between last November and last May. Moreover, the smart meter pilot is part of the ComEd’s broader "Smart Grid Innovation Corridor," one of the broadest collections of smart grid pilots in the country. ComEd's overall smart grid pilot involves new technology and implementation approaches in areas such as residential solar power, ComEd's first intelligent substation, distribution automation and electric vehicle charging stations.

To help pay the freight, ComEd asked the ICC to approve a "system modernization project" charge (or SMP rider) to retail customers that would immediately recoup these smart grid development costs. Under Illinois law, the ICC generally is precluded from engaging in so-called “single-issue rate making” – i.e., riders aimed at addressing particular costs elements in isolation from a utility’s overall costs. However, there is an exception for “exceptional circumstances.”

In this case, ComEd argued, the SMP rider was new and innovative and created a mechanism for funding discretionary projects that are not necessary for retail distribution service as such. Further, ComEd argued that the smart meter infrastructure -- the new meters and the necessary computer software and hardware to process the information collected from the smart meters -- were essential “building blocks” for smart grid development.

The ICC approved the SMP rider to the extent limited to smart meter installation costs. With respect to post-installation costs, the ICC ruled that ComEd could re-file the SMP rider to cover additional smart grid investment. However, Illinois Attorney General Lisa Madigan and the Citizens Utility Board, a nonprofit consumer advocacy group, sought judicial review, arguing that the ICC effectively had created precedent for allowing Illinois utilities to add “fees to consumers’ bills to cover costs, such as capital projects and improvements, which are solely in the [utilities’] control.”

On September 30, 2010, the Appellate Court of Illinois (Second District) overruled the ICC. In its opinion, the Court held that:

Rider SMP does not meet the criteria to warrant single-issue ratemaking. The expenses related to [smart meters] and the smart grid technologies. . . are not unexpected, volatile, or fluctuating, as ComEd alone dictates the program's scope and, therefore, its costs. The capital costs associated with [smart meters] and the smart grid technologies are not the result of legislative mandate, but rather are the result of ComEd's decision to innovate to reduce other costs. ComEd can cover the expenses by a fiscal and operational plan that is completely within the utility's control. The [ICC] heard no evidence that the system modernization costs might produce unacceptable financial outcomes if not afforded special treatment.

For ComEd's customers, the ruling means they could be in store for a possible rebate — upwards of $48 million, according to an October 4, 2010 ComEd filing with the SEC. In the meantime, ComEd must reevaluate how best to cover the costs of smart grid development and, according to press reports, the appellate court's decision places the smart meter pilot in jeopardy. ComEd has until November 4, 2010 to appeal the appellate court's decision to the Illinois Supreme Court.

It must be emphasized that the court's reasoning was based entirely on questions of Illinois retail rate making law and did not involve the long term benefits of smart meters or the smart grid. Thus, it could be a mistake to draw any global inferences regarding overall smart grid development. Nonetheless, the court's action highlights a recurring smart grid theme: the product may be great, but who pays?