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Incentive Ratemaking in Illinois: The Transition to Competitive Markets

Fortnightly Magazine - July 15 1995

toward regulatory reform and transforming the state's electric utility industry.

The question is no longer whether open access will come, but when. Regulatory agencies cannot impede these changes by delaying competitive alternatives. Rather, they must play a role in this dynamic process by focusing on the questions posed by the transition, not whether a transition should occur. Uncertainty and inaction are costlier and more pernicious to business than a plan of action with clear objectives and timetables. Passage of this legislation is a first, albeit small, step in that direction.

In the nascent stages of competition, regulatory decisions have a tremendous impact on the development of markets. Errors (em big

or small (em can significantly delay the formation of a mature and competitive market. With the ability to consider alternative forms of regulation, we are taking the first steps in a long journey to meet the myriad challenges facing Illinois utilities. Any alternative to traditional rate-of-return regulation will be judged on how well it makes the transition from the currently controlled market to competition. In Illinois, that judgment will be made not through speculation and conjecture, but rather by actual market performance. t

Agustin J. Ros and Terry S. Harvill are policy advisors to chairman Dan Miller of the Illinois Commerce Commission, assisting on issues concerning telecommunications, electricity, natural gas, water, and transportation. Dr. Ros received his BA in economics from Rutgers University and his MS and PhD in economics from the University of Illinois at Urbana-Champaign. Mr. Harvill received both his BS and MS in economics from Illinois State University. The views and opinions expressed in this article are those of the authors and are not necessarily those of the ICC or any Commissioner.

The Illinois Electric Reform Bill, SB 232

Be it enacted by the People of the State of Illinois, represented in the General Assembly.

[as edited, and with emphasis added]

Sec. 9-244. Performance-based rates. Notwithstanding any other Sections of this Act of the Commission's Rules, the Commission, upon petition by a public utility and after hearing, may authorize for that utility on an experimental basis, the implementation of one or more programs consisting of (1) alternatives to rate-of-return regulation, or (b) other regulatory mechanisms that reward or penalized utilities through the adjustment of rates based on utility performance.... Before authorizing ... [(a) or (b), above] ... the Commission shall:

(1) make a finding that the implementation of such programs is in the public interest;

(2) make a finding that the implementation of such programs will produce fair, just, and reasonable rates ...;

(3) where appropriate, make a finding that the programs respond to changes in the utility's industry that are in fact occurring;

(4) specifically identify how the programs' departure from traditional rate-of-return ratemaking principles will benefit ratepayers through the realization of one or more of the following: efficiency gains, cost savings, or improvements in productivity.


Any such programs shall not extend beyond the public utility's service territory and shall not extend beyond June 30, 2000.

1. Clearly, rate-of-return regulation functions differently in different jurisdictions. Some PUCs