ComEd 2013 Annual Report Download - page 61

Regulatory Accounting
Exelon,ComEd, PECO and BGE account for theirregulatedelectric andgasoperationsinaccordancewiththe authoritative
guidancefor accountingfor certaintypesofregulations, which requiresExelon,ComEd, PECO and BGE to reflecttheeffectsof
cost-basedrate regulation intheirfinancial statements. This guidanceis applicable to entitieswithregulatedoperationsthat meet the
followingcriteria:(1)ratesare establishedor approvedbyathird-partyregulator;(2)ratesare designedto recover the entities’ cost
ofprovidingservicesor products; and(3)a reasonable expectation that ratesare set at levelsthat will recover the entitiescostsfrom
customers. Regulatoryassetsrepresent incurredcoststhat havebeen deferredbecauseoftheir probable future recoveryfrom
customersthrough regulatedrates. Regulatoryliabilitiesrepresent (1)theexcess recoveryofcostsor accruedcreditsthat havebeen
deferredbecauseitis probable such amountswill be returnedto customersthrough future regulatedrates; or (2)billings inadvance
ofexpendituresfor approvedregulatoryprograms. AsofDecember 31,2013,Exelon,ComEd, PECO and BGE haveconcludedthat
the operationsofComEd, PECO and BGE meet thecriteria to applythe authoritativeguidance.Ifitis concludedinafuture period
that a separable portion ofthose operationsno longer meetsthecriteriaofthis guidance,Exelon,ComEd, PECO and BGE wouldbe
requiredto eliminate anyassociatedregulatoryassetsandliabilitiesandtheimpactwouldberecognizedintheConsolidated
StatementsofOperationsandcouldbematerial.See Note 3 oftheCombinedNotesto ConsolidatedFinancial Statementsfor
additional information regardingregulatorymatters, includingtheregulatoryassetsandliabilitiestablesofExelon,ComEd, PECO
and BGE.
For each regulatoryjurisdiction inwhich theyconductbusiness, Exelon,ComEd, PECO and BGE assess whether theregulatory
assetsandliabilitiescontinue to meet thecriteriafor probable future recoveryor settlement at each balancesheet date andwhen
regulatoryeventsoccur. This assessment includesconsideration ofrecent rate orders, historical regulatorytreatment for similar
costsinComEd’s, PECO’s and BGE’s jurisdictions, andfactorssuch aschangesin applicable regulatoryandpolitical environments.
Furthermore,Exelon,ComEd, PECO and BGE makeother judgmentsrelatedto thefinancial statement impactoftheirregulatory
environments, such asthetypesofadjustmentsto rate basethat will beacceptable to regulatorybodies, if any, to which costswill be
recoverable through rates. Refer to therevenue recognition discussion belowfor additional information on the annual revenue
reconciliationsassociatedwithComEd’s distribution formula rate tariff, pursuant to EIMA,andFERC-approvedtransmission formula
rate tariffs for ComEd and BGE. Additionally, estimatesare madeinaccordancewiththe authoritativeguidancefor contingenciesas
to theamount ofrevenuesbilledunder certainregulatoryordersthat mayultimatelyberefundedto customersupon finalization of
applicable regulatoryor judicial processes. Theseassessmentsare based, to theextent possible,on past relevant experiencewith
regulatorybodiesinComEd’s, PECO’s and BGE’s jurisdictions, knowncircumstancesspecific to a particular matter andhearings
heldwiththe applicable regulatorybody. If theassessmentsandestimatesmadeby Exelon,ComEd, PECO and BGE are ultimately
different than actual regulatoryoutcomes, theimpactontheirresultsofoperations, financial position,andcash flows couldbe
material.
TheRegistrantstreat theimpactsofafinal rate order receivedafter thebalancesheet date but prior to theissuanceofthefinancial
statementsasa non-recognizedsubsequent event,asthereceipt ofafinal rate order is aseparate and distinctevent that hasfuture
impactson the partiesaffectedbytheorder.
Accounting for Derivative Instruments
TheRegistrantsutilizederivativeinstrumentsto managetheirexposure to fluctuationsininterest rates, changesininterest rates
relatedto plannedfuture debtissuancesandchangesinthefairvalue ofoutstandingdebt.Generation usesavarietyofderivative
andnon-derivativeinstrumentsto managethecommoditypricerisk ofitselectric generation facilities, includingpower sales, fuel and
energy purchasesandother energy-relatedproductsmarketedandpurchased. Additionally, Generation entersinto energy-related
derivativesfor proprietarytradingpurposes. ComEd hasenteredinto contractsto procure energy, capacityandancillaryservices. In
addition,ComEd hadafinancial swap contractwithGeneration that expiredMay31,2013 andcurrentlyholds floating-to-fixed
energy swapswithseveral unaffiliatedsuppliersthat extendinto 2032. PECO and BGE have enteredinto derivative natural gas
contractsto hedgetheir long-termpricerisk inthe natural gasmarket. PECO hasalso enteredinto derivativecontractsto procure
electric supplythrough acompetitiveRFP process asoutlinedinitsPAPUC-approved DSP Program. BGE hasalso enteredinto
derivativecontractsto procure electric supplythrough acompetitiveauction process asoutlinedinits MDPSC-approved SOS
Program. ComEd, PECO and BGE do not enter into derivativesfor proprietarytradingpurposes. TheRegistrants’ derivative
activitiesare inaccordancewithExelon’s Risk Management Policy (RMP). See Note 12 oftheCombinedNotesto Consolidated
Financial Statementsfor additional information regardingtheRegistrants’ derivativeinstruments.
TheRegistrantsaccount for derivativefinancial instrumentsunder the applicable authoritativeguidance.Determiningwhether or not
acontractqualifiesasaderivativeunder this guidancerequiresthat management exercisesignificant judgment,includingassessing
themarket liquidityaswell asdeterminingwhether a contracthasone or more underlyings andone or more notional amounts.
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