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If its consumer rates are frozen, ComEd may actually file for bankruptcy protection, with . Page 1 of 2
Story URL: http://news.medill.northwestern.edu/chicago/news.aspx?id=4633 Story Retrieval Date: 8/9/2007 7:40:50 PM CST
If its consumer rates are frozen, ComEd may actually file for bankruptcy
protection, with broad consequences
by Melanie G. Rogers
Mar 01, 2007
Commonwealth Edison Co. is preparing to make good on its threat to seek bankruptcy protection if the Illinois legislature freezes the company's consumer electricity rates. The consequences could be dire and widespread, including defaults to bondholders, unions and retirees. Wall Street takes it seriously.
President J. Barry Mitchell confirmed in an interview Wednesday that the company has retained attorneys to explore a bankruptcy filing.
On Tuesday ComEd CEO Frank M. Clark presented the company's case to the committee of the whole of the Illinois House of Representatives in Springfield. It’s rare for the entire House to meet as a committee.
“It was a spectacle,” Mitchell said. “Not a very constructive result.”
House Speaker Mike Madigan’s press secretary Steve E. Brown called the threatened bankruptcy “part of the hoax perpetrated on consumers in Illinois to maximize profits.”
In 1997 the legislature enacted a 10-year electricity rate freeze to encourage competition. Now that the freeze has thawed, ComEd has increased rates by 24 percent, much to the dismay of consumers and legislators. Although competition has arisen in the Chicago-area market for commercial power, it has not yet developed in the retail market.
ComEd cites its need to pay the 16 electricity suppliers from which it contracted to purchase power in an energy auction in September 2006. Another subsidiary of its parent company, Chicago-based Exelon Corp., supplies 35 percent of that power, according to Daniele M. Seitz, an Exelon analyst with New York’s Dahlman Rose and Co.
If the legislature freezes its consumer rates, ComEd would likely file for Chapter 11 protection, which would not require liquidating its assets, but would suspend all claims against the company and prevent creditors from collecting while a reorganization plan is developed. That could take months or even years. ComEd could delay payments into the future, or could negotiate reductions in its obligations, including union contracts and retirement payments.
Companies may file for bankruptcy at any time; the federal code doesn't impose any financial condition requirements that must be demonstrated in order to file. For instance, no debt-to-equity ratio is specified, nor specific amounts of debt.
As to when ComEd would file, Mitchell said it depends “on the nature of the legislation and what recourse we think we might have from a legal standpoint.”
If a rate freeze passes, “it’s not something where we run out of money the first day, but at a $4 million a day shortfall we obviously can’t absorb that many days,” Mitchell said. “Even though we may have a good case, time works against us in that process. Expenses don’t go away while we’re trying to get a court order.” The company's rate increase has been approved by the Illinois Commerce Commission, but it's opposed by the watchdog Citizens Utility Board.
ComEd’s bankruptcy could affect its 11,000 retirees, of whom 8,200 live in Illinois.
The pension fund would be considered “to the extent to keep it fully funded,” Mitchell said. “Everything would be on the table. We would have to look at every single cash outlay.”
Robert Joyce, president of ComEd’s Downers Grove-based union, Local 15 of the International Brotherhood of Electrical Workers, said, “I don’t care for it. It’s not in the best interests of our members.”
He also said “it’s a wait-and-see game” and that if ComEd files for bankruptcy, the union would get a legal team together, though it has not yet done so.
Joyce, whose union represents 5,500 Exelon employees, said that during the 10-year freeze the company did not ask the union for concessions.
Mitchell said bankruptcy could put reliability at risk because the company will not be able to invest in its power delivery system.
If its consumer rates are frozen, ComEd may actually file for bankruptcy protection, with . Page 2 of 2
Morningstar analyst Paul Justice agreed: "As the regulatory environment erodes in Illinois, fewer companies will make investments in infrastructure. Companies that make these kinds of investments have a long memory.”
Mitchell said that if ComEd defaults on its September 2006 supplier contracts, those suppliers are unlikely to negotiate new lower-priced contracts.
He said relations with creditors are “all right at the moment but it’s something our critics are unreasonably cavalier about. Our bonds have already been given junk bond status just because of the threat of legislation."
Analysts say the possibility of bankruptcy is real.
“They know damn well if someone is crazy enough to put a freeze on,” said Seitz of Dahlman Rose. “They are very serious. You do not want to come to a point where you cannot pay your bills, have no assets, nothing. You have to pay for delivery wires and to deliver it.”
While the 24 percent rate increase approved by the ICC may seem high, Seitz said, it's lower than in states like Florida. She also said, “New Jersey pays $120 per megawatt hour, enough to serve 1000 houses," while Illinois pays only $63.26 per megawatt hour.
The freeze idea has strong sponsorship in the Illiniois House. Rep. George Scully (D-Crete), chairman of the electric utility oversight committee, introduced the legislation, and Speaker Madigan (D-Chicago) supports it.
Dismissing ComEd's protests, Madigan's press secretary Brown declared, “They’re their own suppliers." He said Madigan “is concerned the company has taken the steps it has taken, putting consumers and families in jeopardy. The rhetoric of the company doesn’t ring true.”
Brown did not offer an alternative way for ComEd to make up any cash shortfall. “They should have a profit that’s reasonable, that doesn’t gouge consumers. It costs one cent per kilowatt-hour to generate it and they are selling it for seven or eight cents. They can make a profit, sure, but that’s highway robbery.”
In contrast, State Senate President Emil Jones Jr. (D-Chicago) opposes another rate freeze. Spokeswoman Cindy Davidsmeyer said, “he believes in the reliability of power and part of the reason to deregulate was to spur competition. The rates were artificially low.” Davidsmeyer was not aware of ComEd’s bankruptcy threat.
ComEd, with annual revenues of $15 billion, employs 5,500 and serves approximately 5.2 million customers, or 70 percent of Illinois’s population.
Shareholders likely won’t be affected if ComEd files for bankruptcy. The stock of parent company Exelon is listed on the New York Stock Exchange.
Brendan Intindola of the NYSE said the listing will continue “so long as the company remains in good standing… If a unit files for bankruptcy, the parent’s stock will not be affected.” He said that companies have to meet both numeric and corporate governance listing standards, which are posted on the NYSE regulation Web site.
2001 - 2007 Medill Reports - Chicago, Northwestern University. A publication of the Medill School
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