Illinois Affordable Energy Campaign _IAEC_

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					The Illinois Affordable Energy Campaign (IAEC) started meeting in January of 2003 to discuss policy
changes that can improve the current Low Income Home Energy Assistance Program (LIHEAP).
While the LIHEAP program is a great benefit for low-income people, the program can be greatly
improved through a series of common sense reform measures that will: make energy more affordable
for the program LIHEAP customers; fund program changes by redistributing program resources rather
than increasing program costs; and improve the ability of utilities to manage or bear the cost of
providing services to low-income consumers without serious harm or loss.

The basic goals of the IAEC are:

   1.      To make energy more affordable for LIHEAP program consumers by redistributing
           program benefits in a manner that will allow for an affordable payment plan.

   2.      Propose a portfolio of cost containment and revenue enhancing mechanisms that will allow
           for a redistribution of program resources in an affordable manner and suggest
           opportunities to secure additional resources needed to serve more of the eligible

   3.      Reconfigure the interrelated funding and service complexities of the program in a manner
           that will simplify program regulations and the distribution of the program resources.

   4.      To use market mechanisms to stabilize the volatile costs of natural gas.

   5.      To reduce: the number of households chronically behind on monthly bill payments; the
           number of households that need to have services disconnected due to non-payment; and
           reduce collection expenses for delinquent LIHEAP customers.

Current Low Income Home Energy Assistance Program (LIHEAP) Program Description

For many Illinois households, energy costs place a severe and continuing stress on the family's
budget. In some instances, the household is forced to make painful decisions regarding which bills to
pay and which necessities to survive without. The Low Income Home Energy Assistance Program
(LIHEAP) was started in the mid 1970’s to assist eligible low-income households pay for winter energy
services. The LIHEAP is funded by the U. S. Department of Health and Human Services and the
State of Illinois. Both the federal and state programs are administered by the Illinois Department of
Commerce and Economic Opportunity (DCEO). Energy Assistance is provided by local community
action agencies or not-for-profit agencies throughout the state.

The federal LIHEAP program is designed to help low-income households with their home energy bills.
LIHEAP can assist eligible households to stay warm in the winter and cool in the summer. By doing
so, the risk of health and safety issues (such as illness, fire, or eviction) is reduced. The federal
government does not provide energy assistance directly to the public. Instead, LIHEAP services are
provided by Community Action Agencies and other not-for-profit service agencies called Local Area
Agencies (LAA’s) under contract with the State of Illinois DCEO.

The Illinois LIHEAP program is funded through a monthly meter (gas & electric) surcharge. The
surcharge rate schedule is:

    1)     $0.40 per month on each account for residential electric service;
    2)     $0.40 per month on each account for residential gas service;
    3)     $4 per month on each account for non-residential electric service which had less than 10
           megawatts of peak demand during the previous calendar year;
    4)     $4 per month on each account for non-residential gas service which had distributed to it
           less than 4 million therms of gas during the previous calendar year;
    5)     $300 per month on each account for non-residential electric service which had 10
           megawatts or greater of peak demand during the previous calendar year; and
    6)     $300 per month on each account for non-residential gas service which had 4 million or
           more therms of gas distributed to it during the previous calendar year.1

The federal program provides approximately $75 million per year for energy assistance and the state
program provides approximately $65 million. When the federal and state LIHEAP programs are
combined, the current program distributes a total of approximately $140 million to 316,000 households
in 2003.2

Program Eligibility

A person may be eligible to receive assistance under LIHEAP if the household's combined income is
at or below 150 percent of poverty. The chart below gives an indication of what your income can be
and still receive LIHEAP assistance. If you rent, and your heat and/or electric is included in the rent,
then your rent must be greater than 30% of your income in order to be eligible to receive benefits.

                  # of People Living in Household Gross Income for 30 days Prior   Annual
                                                  to Application Date              Income
                                 1                            $1,123               $13,470
                                 2                             $1,515              $18,180
                                 3                            $1,908               $22,890
                                 4                            $2,300               $27,600
                                 5                            $2,693               $32,310
                                 6                            $3,085               $37,020
                                 7                            $3,478               $41,730
                                 8                            $3,870               $46,440

                 For each additional member add $392 - Guidelines effective September 1, 2003

  Illinois Compiled Statutes: Energy Assistance Act of 1989; 305 ILCS 20/13, Sec. 13. Supplemental
Low-Income Energy Assistance Fund.
  DCEO; LIHEAP Status Report, Program Year 2003; As per Larry Dawson, DCEO Chief of Energy, January 15,

Problem: Low-income people cannot afford the current high costs of household energy.
While the average American pays 4-6 percent of their income for energy, low-income people are
paying between 21-31percent. As a result, the stakeholders in the current system struggle to
maintain effectiveness through adaptability. In the meantime, more and more people are unable to
pay for their energy needs and many are accruing higher and higher arrearage amounts.

Chart #1: 3

                   Winter Energy Bills as Percentage of Income

                                                                        Cold Winter
                                                                        Warm Winter

    15%                                                                           13%

    10%                                                         9%
     5%               4%

           General Households      LIHEAP before         LIHEAP after      Low Income
                                     assistance           assistance       unassisted

Also there is the issue that the current Illinois LIHEAP services are not being distributed as equitably
as they should be to the neediest of the needy. As many as 10 percent of the current LIHEAP
population actually get a credit from the Direct Vendor Payment system while nearly half of all
LIHEAP households still have to pay as much as 10 percent to more than 25 percent of their incomes
for energy after they have been served by LIHEAP. According to an Illinois Department of Natural
Resources analysis of this proposal, this unfortunate pattern could be significantly changed by the
Affordable Energy Plan. The chart below shows that instead of having only 21 percent of the LIHEAP
population paying between 5-10 percent of their incomes for energy after assistance (as the current
program does), the Affordable Energy Plan would have as many as 73 percent of the LIHEAP
population paying 5-10 percent of their incomes after assistance for energy. At the same time, the
Affordable Energy Plan could reduce the number of households paying between 10 percent of their
income to more than 25 percent of their incomes after assistance from more than 50 percent of the
current LIHEAP population to 12 percent.

    Illinois Department of Natural Resources, February, 2004.

                             Percent of Income for Natural Gas Heat
                                                      Before assistance
                                         >25% of income

                                                                                      0-5% of income

                                                                                          5-10% of income
                                 10-25% of income

          After Assistance Existing Program                                   After Assistance Proposed Program
             <0% (credits)
                                     0-5% of income
                                         19%                             0-5% of income

                                                                     <0% (credits)
>25% of income                                                           3%
    20%                                                           >25% of income
                                                5-10% of income                                             5-10% of income
                                                     21%           10-25% of income
                                                                         9%                                      73%

             10-25% of income

Solution: By using a series of cost containment and revenue generating concepts, the Affordable
Energy plan proposes fundamental changes in LIHEAP program design. The affordable plan will
target available resources to households that: have the lowest income; households that have the
highest energy burden; and have the highest arrears.

The Illinois Affordable Energy plan has several interdependent components designed to: make energy
more affordable for participants; to encourage regular and affordable payments from L-I consumers;
and to pay for itself through various cost containment options. There are nine components to the

A brief description of each component is outlined below.

(1)         Percentage of Income Payment Plan (PIPP):

            Under the affordable plan, Illinois LIHEAP consumers will have the option to participate in a
            Percentage of Income Payment Plan (PIPP). The PIPP will be a year round program that will
            require participants to pay 7 percent of their income for primary heat and 3 percent for
            secondary energy. If PIPP payments exceed the current bill (i.e. people who continue with the
            PIPP in summer months will possibly pay more than they owe) the excess amount will go for
            paying off default amounts and arrearages. The balance of what is owed to the utility would
            be paid from a portfolio of cost containment measures proposed in section 9 below. Prior to
            gaining entry to the PIPP, the customer would be counseled concerning the possible benefits
            of the PIPP program. The Local Area Agency (LAA) will work with the individual consumer to
            develop an energy self-sufficiency plan (an energy payment plan).

            The amount of the PIPP payment will be based on typical energy usage as determined by the
            Illinois Department of Natural Resources (DNR) annual report. Any consumption of energy

      over the typical use amount will be paid by the client. If a household is an all-electric home,
      the household is eligible for a 10% electrical PIPP. Households who have utility costs included
      as an undesignated portion of their rent or “heat in rent”, and households that have home
      delivered fuel will continue to be served under the current DVP. Consumers who pay electric
      and have heat included in their rent can receive a 3 percent PIPP. Consumers who pay a gas
      bill and have electricity included in their rent can receive a 7 percent PIPP.

      Other eligible LIHEAP consumers who chose to not participate in the PIPP will receive a basic
      flat grant. The flat grant amount will be set annually by the Illinois Department of Commerce
      and Economic Opportunity (DCEO) in consultation the DCEO Policy Advisory Council (PAC).
      The flat grant amount will be determined by taking into consideration the amount of available
      program resources and should be set at a level so as to encourage participation in the PIPP.

      Some have argued that a PIPP would cost the state as much as $100 million. While an
      analysis was done in 1996 that shows a PIPP would cost approximately that much, that
      analysis was done prior to the Illinois LIHEAP (meter charge) was implemented, and that
      analysis did not include a hedging strategy. A Illinois Department of Natural Resources
      analysis of the PIPP proposed in this plan demonstrates that the program could conceivably
      serve more people for the same price ($140 million) during a warm winter. During a cold
      winter the LIHEAP program could need as much as $10-$20 million. See the chart below:

                                   Net Cost of 7%/3% PIPP
                                           with insurance





                               $150 DVP                         $300 DVP



(2)   Energy Efficiency:

      Energy efficiency is an important component of any future LIHEAP plan because of its ability
      to help control the state’s cost by lowering the heating bills of participants. The DCEO in
      consultation with the PAC shall establish an energy efficiency and weatherization program
      targeted, to the extent practicable, to high-cost, high-volume use structures occupied by
      customers eligible for the PIPP, with the goal of reducing the energy bills of the occupants.
      Acceptance of energy efficiency and weatherization services provided by the program shall be
      a condition for the eligibility of any such customer to participate in the percentage of income
      payment plan program.

     There are two main goals for the energy efficiency component of Affordable Energy Plan.

     1) Targeting the highest cost households for weatherization
     2) Providing no-cost, low-cost efficiency strategies for all participants

     As a guideline, the DCEO and the PAC should consider information provided by participants
     on the size, heating systems, building characteristics, etc. of their homes as well as analyzing
     gas bills of participants and targeting the top energy users to receive further weatherization
     services. These services would be inline with those currently offered by the state
     weatherization program, i.e. home repairs, replacement windows, furnaces etc. The resources
     would also come from the current state and federal LIHEAP weatherization funds.

     The program should also include some form of agreement that participants will implement a
     series of low-cost/no-cost energy efficiency measures. To ensure participation in this
     component, it is important to create an incentive structure of some kind. For example, the
     program could include a bonus payment for households whose weather-adjusted use of gas
     during the winter is lower than their use during the previous winter. Other incentives (as
     mentioned above) would be to have a maximum payment based on average consumption of
     energy. The efficiency information could be relayed in two ways 1) at required workshops or
     2) at the time of application.

     PIPP participants should also be provided with the option to enroll with the local Workforce
     Investment Agency (WIA) for job referral and training at the time of application for energy

3)   Hedging on Natural Gas Costs:

     As everyone is aware, the price of natural gas has been volatile for the past several years.
     There is a very high demand from natural gas in the current marketplace. Also, there has
     been a decreasing supply of natural gas, creating a market force that drives up the price of
     natural gas. For a chart that shows the volatility of natural gas in Illinois see attached page 9.

     To protect the LIHEAP program from having to pay very high gas bills in during a time when
     prices are very high (i.e. the winter of 2001), the department will have to use financial hedging
     tools. DCEO and the PAC will predetermined the amount of funding allocated for this purpose
     each year. The amount should be based upon projections in the price of natural gas, and the
     consumption of gas by program participants. If hedging results in the accrual of program
     resources in excess of what is needed for the program, these resources should be carried
     over to the next year to purchase the hedging costs for the next program year.

     The current IL LIHEAP design simply allows higher natural gas costs to be passed on to the
     LIHEAP consumers. Hedging will correct that flaw by providing a protection for LIHEAP
     resources at minimal cost to the program. The most practical way of understanding hedging is
     to view it as purchasing insurance that natural gas prices will not exceed a certain amount. If
     the price of natural gas exceeds projections, the hedging options will add resources during a
     colder winter rather than the opposite effect of the current system that increases cost burden
     on consumers. In a warmer than average heating season the hedging will be a cost to the
     program much like car insurance is a cost if there are no accidents or repairs that can be
     claimed against the insurance. In either case, the program planning will be simpler due to the
     ability to project program costs outside the parameters of market fluctuations.

          The volume of natural gas consumed by the participants in the PIPP program will be estimated
          and the DCEO will put out to bid the development and implementation of the hedging strategy.

(4)       Automatic Reconnection

          A Chicago Tribune story in November, 2003 estimated that 40,000 to 50,000 homes were
          disconnected from utilities due to large unpaid balances. This creates a health and safety
          issue that can only be described as a crisis. Due to organizing efforts of service providers and
          advocates, the Illinois Commerce Commission and the Governor negotiated with utilities for an
          affordable reconnection plan ($250 payment or a payment of 20% of the outstanding bill
          whichever the least amount). This was put into effect for this year only on December 11th,

          This reconnection agreement should be made permanent for several basic reasons:

                 a. The current Emergency Services (ES) provision of IL LIHEAP is using
                    approximately 15 percent of all LIHEAP resources.4 This amounts to millions of
                    LIHEAP resources being utilized for reconnection and arrearage reduction. As
                    described below, the primary purpose of LIHEAP is to help meet the immediate
                    needs of eligible households.

                 b. Currently IL LIHEAP allows an eligible household to receive up to $750 of LIHEAP
                    resources for ES. This is in addition to a maximum Direct Vendor Payment (PVP)
                    of $450. The high amount of the allowed ES payment is viewed as a disincentive
                    for LIHEAP households to make regular payments in the warm weather months,
                    and represents an amount of resources that could be applied to assist the unpaid
                    balance of persons participating in the PIPP. For example, every time a person is
                    reconnected at $250 vs. $750, $500 will be made available for redistribution within
                    the program to help pay for the costs of PIPP. This reconnection agreement
                    should not preclude a possible lower reconnection payment plan negotiated by the
                    Local Area Agency (LAA). This agreement does not address the costs associated
                    with ES furnace repairs and replacements.

                 c. The driving principle behind an affordable energy plan is to make energy
                    affordable. Currently, each utility is allowed to prescribe its own payment plan as a
                    condition for reconnection. These payment plans require that the customer pay
                    their current bill plus (overtime) what they owe in arrears. Usually this periods of
                    time does not exceed 12 months (in some cases the repayment period is shorter
                    than 12 months). This is the customer’s only option regardless of: 1) the amount of
                    arrears owed by the customer; and 2) with no consideration for the income of the
                    LIHEAP customer. This is a barrier to participation in a payment plan because in
                    many cases it is not affordable (i.e. the larger the amount owed, the less affordable
                    the monthly payment will be).

                 d. An affordable energy plan should also be designed to reinforce the habit of making
                    an affordable payment on a regular basis. When payments are made routinely on
                    a regular basis: 1) the consumer will be rewarded by seeing the benefit of building
                    their good credit; and 2) increase the utilities collection of a larger share of what is
                    owed to them.

    DCEO handout at December 16, 2004, Policy Advisory Council Meeting, held at CEDA in Chicago.

                  e. Finally, the bill should also make it clear that the utility cannot impose any other
                     conditions for the customer than those mentioned above (a payment of $250 or
                     20% of the total whichever is the least amount).

(5)       How Payments Are Applied:5

          Any money provided to the jurisdictional utility should first be applied to the customer's current
          monthly payment obligation as determined in accordance with the federal LIHEAP program.
          The federal program places the primary emphasis of the LIHEAP program on meeting the
          immediate home energy needs of those with low incomes and high relative energy burdens,
          with a secondary emphasis on reducing the energy needs and costs of such households. Any
          money in excess of the amount necessary to satisfy the current monthly payment obligation
          should be applied to either the amount the customer is in default on an extended payment
          plan, or if no such default exists, then to the customer's arrearages.

(6)       Cost Discounts for Regular Payments:

          This is also a key component of the overall program because it helps achieve two program
          goals. It will make the plan more affordable for consumers, and it will help create better
          customers by encouraging regular payments. For each time a customer makes an on-time
          regular monthly payment for (a period of time to be determined) the utility will give credit to the
          customer (in a manner to be determined) towards a reduction of what the consumer owes in
          arrears. The act therefore proposes to forgive an amount equal to a one month payment for
          every time there are three consecutive monthly payments made.

(7)       Once the arrears are written off by a utility as a bad debt, the arrearage should be
          forgiven to the customer.

          Advocates and service providers agree that even after utilities write off the amounts of
          uncollected payments and arrears, they still continue to try and collect these balances from
          individuals. This practice should be prohibited by law. Once the arrears are written off by a
          utility as a bad debt, the arrearage should be forgiven to the customer.

(8)       Increase reporting requirements for utilities:

          Amend the Public Utilities Act, Article V, 220 ILCS 5/, by requiring every public utility that
          provides gas or electric service to residential customers as primary or secondary sources of
          heating or cooling to report in writing to the Illinois Commerce Commission the following
          information: (1) the number of accounts that are past due each month, (2) the aggregate
          amount of past due balances each month, (3) the number of disconnection notices issued to
          residential customers each month, (4) the number of residential customers disconnected each
          month, (5) the number of residential customers eligible for emergency services under the
          Energy Assistance Act each year, and (6) the aggregate amount of arrears that are written off
          as business bad debt each year.

      9) Pay for the program changes by redistributing the program costs using a portfolio of
         cost containment options:

    Letter from Ohio Partners for Affordable Energy, December 2, 2003.

1. Hedging of a portion of natural gas costs and use cold winters savings to pay for warmer
   winters hedging costs.
2. Redistribute a portion of Illinois LIHEAP funds within the program to pay for PIPP costs.
3. Good faith payment credits will be given for each time a person makes three consecutive
   payments. This should alleviate the arrearage problem over time.
4. Use the savings realized from the codified reconnection requirement of paying $250 or 20
   percent of the total whichever is less, to pay for some the costs of the PIPP.
5. All pre-distribution interest earnings realized from LIHEAP resources that are deposited by
   the State of Illinois should be available for LIHEAP program expenses.
6. Consideration of an across the board waiver to pay for a percentage of the PIPP.
7. Consideration of the Ohio practice of bulk purchasing of natural gas if it can be
   demonstrated that Illinois utilities are not making good purchasing decisions.
8. All additional resources saved or realized through program redistribution or through
   identifying new sources of funding should be made available to pay for the costs of the


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