Exelon 2014 Annual Report Download - page 65

ComEd is required to file a depreciation rate study at least every five years with the ICC. ComEd completed a depreciation study and
filed the updated depreciation rates with both FERC and the ICC in January 2014. This resulted in the implementation of new
depreciation rates effective first quarter 2014.
PECO is required to file a depreciation rate study at least every five years with the PAPUC. In April 2010, PECO filed a depreciation
rate study with the PAPUC for both its electric and gas assets, which resulted in the implementation of new depreciation rates
effective January 1, 2010 for electric transmission assets and January 1, 2011 for electric distribution and gas assets. PECO expects
to complete an updated depreciation study in 2015 and expects this to result in new depreciation rates effective in the first quarter of
2015 for electric transmission assets and first quarter 2016 for electric distribution and gas assets.
The MDPSC does not mandate the frequency or timing of BGE’s depreciation studies. In July 2014, BGE filed revised depreciation
rates with the MDPSC for both its electric distribution and gas assets. Revisions to depreciation rates from this filing were finalized
and effective December 15, 2014.
Defined Benefit Pension and Other Postretirement Benefits
Exelon sponsors defined benefit pension plans and other postretirement benefit plans for substantially all Generation, ComEd,
PECO, BGE and BSC employees. See Note 16—Retirement Benefits of the Combined Notes to Consolidated Financial Statements
for additional information regarding the accounting for the defined benefit pension plans and other postretirement benefit plans.
The measurement of the plan obligations and costs of providing benefits under Exelon’s defined benefit pension and other
postretirement benefit plans involves various factors, including the development of valuation assumptions and accounting policy
elections. When developing the required assumptions, Exelon considers historical information as well as future expectations. The
measurement of benefit obligations and costs is affected by several assumptions including the discount rate applied to benefit
obligations, the long-term expected rate of return on plan assets, the anticipated rate of increase of health care costs, Exelon’s
expected level of contributions to the plans, the incidence of participant mortality, the expected remaining service period of plan
participants, the level of compensation and rate of compensation increases, employee age, length of service, and the long-term
expected investment rate credited to employees of certain plans, among others. The assumptions are updated annually and upon
any interim remeasurement of the plan obligations. The impact of assumption changes or experience different from that assumed on
pension and other postretirement benefit obligations is recognized over time rather than immediately recognized in the income
statement. Gains or losses in excess of the greater of ten percent of the projected benefit obligation or the MRV of plan assets are
amortized over the expected average remaining service period of plan participants. Pension and other postretirement benefit costs
attributed to the operating companies are labor costs and are ultimately allocated to projects within the operating companies, some
of which are capitalized.
Pension and other postretirement benefit plan assets include equity securities, including U.S. and international securities, and fixed
income securities, as well as certain alternative investment classes such as real estate, private equity and hedge funds. See Note
16—Retirement Benefits of the Combined Notes to Consolidated Financial Statements for information on fair value measurements of
pension and other postretirement plan assets, including valuation techniques and classification under the fair value hierarchy in
accordance with authoritative guidance.
Expected Rate of Return on Plan Assets. The long-term EROA assumption used in calculating pension costs was 7.00%, 7.50%
and 7.50% for 2014, 2013 and 2012, respectively. The weighted average EROA assumption used in calculating other postretirement
benefit costs was 6.59%, 6.45% and 6.68% in 2014, 2013 and 2012, respectively. The pension trust activity is non-taxable, while
other postretirement benefit trust activity is partially taxable. The current year EROA is based on asset allocations from the prior year
end. In 2010, Exelon began implementation of a liability-driven investment strategy in order to reduce the volatility of its pension
assets relative to its pension liabilities. Over time, Exelon has decreased its equity investments and increased its investments in fixed
income securities and alternative investments within the pension asset portfolio in order to achieve a balanced portfolio of liability
hedging and return-generating assets. See Note 16—Retirement Benefits of the Combined Notes to Consolidated Financial
Statements for additional information regarding Exelon’s asset allocations. Exelon used an EROA of 7.00% and 6.46% to estimate
its 2015 pension and other postretirement benefit costs, respectively.
Exelon calculates the expected return on pension and other postretirement benefit plan assets by multiplying the EROA by the MRV
of plan assets at the beginning of the year, taking into consideration anticipated contributions and benefit payments to be made
during the year. In determining MRV, the authoritative guidance for pensions and postretirement benefits allows the use of either fair
value or a calculated value that recognizes changes in fair value in a systematic and rational manner over not more than five years.
61