The Illinois state legislature recently passed a controversial piece of legislation to update the state?s grid with a $2.6 billion investment. SB 1652 has cleared the Senate and the House and is now before Governor Quinn, but the Governor has publicly stated he will veto the bill.

To improve the grid, utilities are planning major overhauls; including replacing or reinforcing more than 130,000 utility poles per year and upgrading substations to replace mechanical equipment with digital relays and automate the distribution system. Utilities also plan to build a training facility in the ComEd service territory.

In addition, the bill seeks to encourage more renewable energy by establishing net-metering for those who install solar and other renewable energy forms. It also directs the utilities to provide $20 million to establish a Science and Energy Innovation Trust to support innovative high-growth, energy-related Illinois companies.

Perhaps the most interesting of the planned upgrades is the installation of smart meters in every customer?s home and the incentive for customers to receive a refund on their bills for reducing their usage during high demand hours.

To fund all of this, SB 1652 changes the regulations that set electricity prices. Utility rates would be set according to a formula instead of the traditional rate-making method. The utilities will be able to file for a rate increase every year and the utilities are also guaranteed a return of over 10 percent on equity investments.

On the consumer protection side, the proposed law mandates that if the average residential rate increase exceeds 2.5 percent annually by 2014 the program will terminate. And a sunset provision applies to the entire program in 2017.

The legislation also includes strong utility performance standards on reliability, customer service and job creation with penalties for utilities that fall short. Finally, the bill caps utility earnings, with dollars exceeding the cap being returned to customers through refunds.

Critics are concerned the changes in regulation will allow the utilities to abuse captive ratepayers and are quick to point out that ComEd was just approved for $156 million service rate increase this year. On the other hand, the distribution rate increase is more than offset by the currently low price of wholesale electricity, so much so that the utility estimates consumers will see lower electric bills this June.

The utilities counter that the current regulatory structure does not support long-term infrastructure investments necessary to meet Illinois? growing expectations around energy and that reforming regulations is not the same thing as reducing regulation.

While electric choice in the commercial, industrial, and residential retail sectors is vibrant, choice for regular residential customers in Illinois is still very limited. It?s possible that updating the current grid to a more responsive and dynamic smart grid could improve the ability of alternative providers to compete. The question is how to foster upgrades at the lowest possible costs to consumers.