Moody's Investors Service on Wednesday lowered its outlook on Exelon’s Commonwealth Edison utility subsidiary to negative from stable, citing an “unfavorable” rate case ruling by state regulators.
"The outcome of the rate case, which ComEd will likely appeal, indicates that the utility is facing a more contentious and restrictive regulatory environment in Illinois, which has significant negative credit implications," said Toby Shea, Moody’s vice president - senior credit officer, global project and infrastructure finance.
Earlier this week, Morgan Stanley analysts said the “surprisingly negative outcomes” in the Illinois Commerce Commission’s decisions in the multi-year rate cases for ComEd and Ameren Illinois will result in lower earnings per share for the utilities’ parent companies, slower rate base growth and further regulatory overhang in 2024.
The decisions could lower Exelon’s EPS for 2025 by about 5% and Ameren’s by 2.5%, the analysts estimated.
In the decisions, the ICC set return on equity levels at 8.72% and 8.91% for Ameren Illinois and ComEd, respectively, and denied their multi-year capital expenditure plans, according to the analysts. The ROEs are among the lowest in the electric utility industry, they said.
“The [Illinois] Commission is proving to be less predictable and much less supportive than expected,” the analysts said.
The approved ROE for ComEd is among the lowest 5% of all authorized ROEs for U.S. electric utilities in the last three years, according to Moody’s.
“This ROE level stands out as particularly low given the company exhibits high reliability and has reasonable rates compared to many peers,” Moody’s said. “Moreover, there has been some upward movement in allowed ROEs in other jurisdictions as the industry's cost of capital increases in a rising interest rate environment, making the Illinois ruling stand out as particularly unsupportive of credit quality.”
The ICC authorized a $506 million revenue increase over four years for ComEd, down from its $1.5 billion request, and a $58 million hike for Ameren Illinois, which asked for $448 million over four years, according to the Morgan Stanley analysts.
In Securities and Exchange Commission filings, ComEd and Ameren Illinois said they plan to appeal the decisions.
Ameren Illinois said it intends to take “prudent steps” to align its 2024 operations with the decision, while ensuring safe and adequate service. Options include significant reductions to its capital expenditure and operations and maintenance expense plans, Ameren said.
In its decisions, the ICC said the utilities’ grid plans failed to adequately incorporate customer affordability into their proposals or outline how 40% of plan benefits would go to low-income and environmental justice communities, as required by the Climate and Equitable Jobs Act. The commission gave the utilities three months to propose revised plans.
The Citizens Utility Board, which advocates for residential ratepayers in Illinois, supported the ICC decision.
“After a decade in which electric utilities exploited lax oversight, scandal, and rampant rate hikes to reap excessive profits, the ICC made it clear that ComEd and Ameren must be held accountable to their customers and provide more affordable electric service,” Sarah Moskowitz, CUB executive director, said in a Dec. 14 statement. “Today’s ICC ruling delivered an important message: Utilities need to prove that their grid plans will actually benefit consumers.”
