8-KOther Events

EXELON CORP 8-K Report, Corporate Update (Oct 28, 2011)

Filed October 28, 2011For Securities:EXC

Summary

This Form 8-K filing by Exelon Corporation (EXC) and its subsidiary Commonwealth Edison Company (ComEd) announces significant legislative developments in Illinois. The Illinois General Assembly has overridden the Governor's veto of Senate Bill 1652 (SB 1652) and passed a related "Trailer Bill," which together establish a framework for substantial investments in ComEd's electricity distribution system. This legislation mandates approximately $2.6 billion in capital expenditures by ComEd over the next decade, primarily focused on modernizing the grid, implementing smart grid technology and smart meters, and storm hardening. These investments are intended to improve reliability, reduce outages, create jobs, and enhance economic competitiveness in Illinois. The new legislation also introduces a performance-based formula rate tariff for ComEd, which will replace the current rate-setting process. This new regulatory structure is designed to provide a more predictable rate-making mechanism, similar to federal processes, with an annual "true-up" for actual costs. The return on equity for ComEd will be tied to a formula based on 30-year Treasury notes, with potential adjustments based on performance metrics related to reliability and customer service. The legislation includes consumer protections, such as caps on residential rate increases and provisions for early termination under certain conditions.

Key Highlights

  • 1ComEd to invest approximately $2.6 billion over 10 years in grid modernization, smart grid technology, and storm hardening.
  • 2The legislation establishes a performance-based formula rate tariff for ComEd, replacing the current rate-setting process.
  • 3Approximately $1.3 billion will be invested in smart grid/smart meter technology, aiming to improve meter reading and reduce outage frequency/duration.
  • 4ComEd will contribute $10 million annually for five years to customer assistance programs and $15 million to a new Science and Technology Innovation Trust fund.
  • 5The new rate structure ties ComEd's return on equity to 30-year Treasury notes plus a specified basis point spread, with potential performance-based adjustments.
  • 6The legislation includes consumer protections, such as caps on average residential rate increases and conditions for program termination.

Frequently Asked Questions

The primary impact is a mandated $2.6 billion capital investment by ComEd over ten years to modernize its electricity distribution system, implement smart grid technologies, and storm harden the infrastructure. This is coupled with a transition to a performance-based formula rate tariff for setting customer rates.

The new performance-based formula rate tariff will tie ComEd's return on equity to a benchmark (30-year Treasury notes plus a spread), which is expected to be lower than the previously approved rate. However, the predictability of the formula rate and the potential for cost recovery through the annual 'true-up' mechanism may offer stability. Performance metrics related to reliability and customer service can also impact the allowed return, potentially reducing it if targets are not met.

Yes, the legislation includes several consumer benefits. ComEd will invest $1.3 billion in smart meters and grid enhancements expected to reduce outage frequency and duration. Additionally, ComEd will contribute $10 million annually for five years to customer assistance programs for low-income customers and other vulnerable groups. The legislation also includes consumer protections, such as caps on annual residential rate increases.

The performance metrics that can affect ComEd's return on equity are related to reliability (improvements in outage duration and frequency) and customer service (customer savings and reductions in estimated bills). Failure to meet annual milestones in these areas can lead to reductions in the allowed return on equity.