Allegheny Power 2015 Annual Report Download - page 141

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124
PJMMarketReform:PJMCapacityPerformanceProposal
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InDecember2014,PJMsubmittedproposed“CapacityPerformance”reformsofitsRPMcapacityandenergymarkets.OnJune9,
2015,FERCissuedanorderconditionallyapprovingthebulkoftheproposedCapacityPerformancereformswithaneffectivedateof
April1,2015,anddirectedPJMtomakeacompliancefilingreflectingthemandateofFERC’sorder.OnJuly9,2015,severalparties,
includingFESConbehalfofcertainofitsaffiliates,submittedrequestsforrehearingforFERC'sJune9,2015order,andPJM
submitteditscompliancefilingasdirectedbytheorder.TherequestsforrehearingandPJM'scompliancefilingarependingbefore
FERC.
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InAugustandSeptember2015,PJMconductedRPMauctionspursuanttothenewCapacityPerformancerules.FirstEnergy’snet
competitivecapacitypositionasaresultoftheBRAandCapacityPerformancetransitionauctionsisasfollows:

20162017 20172018 20182019*
Legacy
Obligation
Capacity
Performance
Legacy
Obligation
Capacity
Performance
Base
Generation
Capacity
Performance
(MW) ($/MWD) (MW) ($/MWD) (MW) ($/MWD) (MW) ($/MWD) (MW) ($/MWD) (MW) ($/MWD)
ATSI2,765 $114.23 4,210 $134.00 375 $120.00 6,245 $151.50 — $149.98 6,245 $164.77
RTO875 $59.37 3,675 $134.00 985 $120.00 3,565 $151.50 240 $149.98 3,930 $164.77
AllOther
Zones
135 $119.13 — $134.00150 $120.00 — $151.5035**20**
3,7757,8851,5109,81027510,195
*Approximately885MWsremainuncommittedforthe2018/2019deliveryyear.
**BaseGeneration:10MWsclearedat$200.21/MWDand25MWsclearedat$149.98/MWD.CapacityPerformance:5MWsclearedat
$215.00/MWDand15MWsclearedat$164.77/MWD.
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PJMMarketReform:FERCOrderNo.745DR
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OnMay23,2014,adividedthreejudgepaneloftheU.S.CourtofAppealsfortheD.C.CircuitissuedanopinionvacatingFERC
Order No. 745, which required that, under certain parameters, DR participating in organized wholesale energy markets be
compensatedatLMP.ThemajorityconcludedthatDRisaretailservice,andthereforefallsunderstate,andnotfederal,jurisdiction,
andthatFERC,therefore,lacksjurisdictiontoregulateDR.ThemajorityalsofoundthatevenifFERChadjurisdictionoverDR,Order
No.745wouldbearbitraryandcapriciousbecause,underitsrequirements,DRwasinappropriatelyreceivingadoublepayment(LMP
plusthesavingsofforegoneenergypurchases).OnJanuary25,2016,theUnitedStatesSupremeCourtreversedtheopinionofthe
U.S.CourtofAppealsfortheD.C.Circuitandremandedforfurtheraction,findingFERChasstatutoryauthorityundertheFPAto
regulatecompensationofdemandresponseresourcesinFERCjurisdictionalwholesalepowermarkets.TheUnitedStatesSupreme
CourtalsoreversedtheholdingthatFERC'sOrderNo.745wasarbitraryandcapricious,findingthattheorderincludeddetailed
supportofthechosencompensationmethod.
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OnMay23,2014,asamendedSeptember22,2014,FESC,onbehalfofitsaffiliateswithmarketbasedrateauthorization,fileda
complaintaskingFERCtoissueanorderrequiringtheremovalofallportionsofthePJMTariffallowingorrequiringDRtobeincluded
inthePJMcapacitymarket,witharefundeffectivedateofMay23,2014.FESCalsorequestedthattheresultsoftheMay2014PJM
BRAbeconsideredvoidandlegallyinvalidtotheextentthatDRclearedthatauctionbecausetheparticipationofDRinthatauction
wasunlawful.However,inlightoftheUnitedStatesSupremeCourt'sJanuary25,2016decisiondiscussedabove,onJanuary29,
2016,FESCwithdrewthecomplaint.
15.COMMITMENTS,GUARANTEESANDCONTINGENCIES
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NUCLEARINSURANCE
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ThePriceAndersonActlimitsthepublicliabilitywhichcanbeassessedwithrespecttoanuclearpowerplantto$13.5billion
(assuming103unitslicensedtooperate)forasinglenuclearincident,whichamountiscoveredby:(i)privateinsuranceamountingto
$375millionand(ii)$13.1billionprovidedbyanindustryretrospectiveratingplanrequiredbytheNRCpursuantthereto.Undersuch
retrospectiveratingplan,intheeventofanuclearincidentatanyunitintheUnitedStatesresultinginlossesinexcessofprivate
insurance,upto$127million(butnotmorethan$19millionperunitperyearintheeventofmorethanoneincident)mustbe
contributedforeachnuclearunitlicensedtooperateinthecountrybythelicenseesthereoftocoverliabilitiesarisingoutofthe
incident.Basedontheirpresentnuclearownershipandleaseholdinterests,FirstEnergy’smaximumpotentialassessmentunder
theseprovisionswouldbe$509million(NG$501million)perincidentbutnotmorethan$76million(NG$75million)inanyoneyear
foreachincident.
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InadditiontothepublicliabilityinsuranceprovidedpursuanttothePriceAndersonAct,FirstEnergyhasalsoobtainedinsurance
coverageinlimitedamountsforeconomiclossandpropertydamagearisingoutofnuclearincidents.FirstEnergyisamemberof
NEIL,whichprovidescoverage(NEILI)fortheextraexpenseofreplacementpowerincurredduetoprolongedaccidentaloutagesof
nuclearunits.UnderNEILI,FirstEnergy’ssubsidiarieshavepolicies,renewableannually,correspondingtotheirrespectivenuclear
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interests,whichprovideanaggregateindemnityofuptoapproximately$1.96billion(NG$1.93billion)forreplacementpowercosts
incurredduringanoutageafteraninitial20weekwaitingperiod.MembersofNEILIpayannualpremiumsandaresubjectto
assessmentsiflossesexceedtheaccumulatedfundsavailabletotheinsurer.FirstEnergy’spresentmaximumaggregateassessment
forincidentsatanycoverednuclearfacilityoccurringduringapolicyyearwouldbeapproximately$15million(NG$15million).

FirstEnergyisinsuredastoitsrespectivenuclearinterestsunderpropertydamageinsuranceprovidedbyNEILtotheoperating
companyforeachplant.Underthesearrangements,upto$2.75billionofcoveragefordecontaminationcosts,decommissioning
costs,debrisremovalandrepairand/orreplacementofpropertyisprovided.FirstEnergypaysannualpremiumsforthiscoverageand
isliableforretrospectiveassessmentsofuptoapproximately$83million(NG$81million).

FirstEnergyintendstomaintaininsuranceagainstnuclearrisksasdescribedaboveaslongasitisavailable.Totheextentthat
replacementpower,propertydamage,decontamination,decommissioning,repairandreplacementcostsandothersuchcostsarising
fromanuclearincidentatanyofFirstEnergy’splantsexceedthepolicylimitsoftheinsuranceineffectwithrespecttothatplant,to
theextentanuclearincidentisdeterminednottobecoveredbyFirstEnergy’sinsurancepolicies,ortotheextentsuchinsurance
becomesunavailableinthefuture,FirstEnergywouldremainatriskforsuchcosts.
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TheNRCrequiresnuclearpowerplantlicenseestoobtainminimumpropertyinsurancecoverageof$1.06billionortheamount
generallyavailablefromprivatesources,whicheverisless.Theproceedsofthisinsurancearerequiredtobeusedfirsttoensurethat
thelicensedreactorisinasafeandstableconditionandcanbemaintainedinthatconditionsoastopreventanysignificantriskto
thepublichealthandsafety.Within30daysofstabilization,thelicenseeisrequiredtoprepareandsubmittotheNRCacleanupplan
forapproval.Theplanisrequiredtoidentifyallcleanupoperationsnecessarytodecontaminatethereactorsufficientlytopermitthe
resumptionofoperationsortocommencedecommissioning.Anypropertyinsuranceproceedsnotalreadyexpendedtoplacethe
reactorinasafeandstableconditionmustbeusedfirsttocompletethosedecontaminationoperationsthatareorderedbytheNRC.
FirstEnergyisunabletopredictwhateffecttheserequirementsmayhaveontheavailabilityofinsuranceproceeds.

GUARANTEESANDOTHERASSURANCES

FirstEnergyhasvariousfinancialandperformanceguaranteesandindemnificationswhichareissuedinthenormalcourseof
business. These contracts include performance guarantees, standby letters of credit, debt guarantees, surety bonds and
indemnifications.FirstEnergyentersintothesearrangementstofacilitatecommercialtransactionswiththirdpartiesbyenhancingthe
valueofthetransactiontothethirdparty.

Asof December31,2015, outstandingguaranteesandotherassurancesaggregatedapproximately$3.7billion,consistingof
parentalguarantees($583million),subsidiaries'guarantees($2,137million),otherguarantees($300million)andotherassurances
($667million).

Ofthisaggregateamount,substantiallyallrelatestoguaranteesofwhollyownedconsolidatedentitiesofFirstEnergy.FES'debt
obligationsaregenerallyguaranteedbyitssubsidiaries,FGandNG,andFESguaranteesthedebtobligationsofeachofFGandNG.
Accordingly,presentandfutureholdersofindebtednessofFES,FG,andNGwouldhaveclaimsagainsteachofFES,FG,andNG,
regardlessofwhethertheirprimaryobligorisFES,FG,orNG.

COLLATERALANDCONTINGENTRELATEDFEATURES

Inthenormalcourseofbusiness,FEanditssubsidiariesroutinelyenterintophysicalorfinanciallysettledcontractsforthesaleand
purchaseofelectriccapacity,energy,fuelandemissionallowances.Certainbilateralagreementsandderivativeinstrumentscontain
provisionsthatrequireFEoritssubsidiariestopostcollateral.Thiscollateralmaybepostedintheformofcashorcreditsupportwith
thresholdscontingentuponFE'soritssubsidiaries'creditratingfromeachofthemajorcreditratingagencies.Thecollateraland
creditsupportrequirementsvarybycontractandbycounterparty.Theincrementalcollateralrequirementallowsfortheoffsettingof
assets and liabilities with the same counterparty, where the contractual right of offset exists under applicable master netting
agreements.

BilateralagreementsandderivativeinstrumentsenteredintobyFEanditssubsidiarieshavemarginingprovisionsthatrequireposting
ofcollateral.BasedonFES'powerportfolioexposureasofDecember31,2015,FEShaspostedcollateralof$188millionandAE
Supplyhaspostednocollateral.TheRegulatedDistributionsegmenthaspostedcollateralof$1million.

Thesecreditriskrelatedcontingentfeaturesstipulatethatifthesubsidiaryweretobedowngradedorloseitsinvestmentgradecredit
rating(basedonitsseniorunsecureddebtrating),itwouldberequiredtoprovideadditionalcollateral.Dependingonthevolumeof
forwardcontractsandfuturepricemovements,higheramountsformarginingcouldberequired.

SubsequenttotheoccurrenceofaseniorunsecuredcreditratingdowngradetobelowS&P'sBBBandMoody'sBaa3,ora“material
adverseevent,”theimmediatepostingofcollateraloracceleratedpaymentsmayberequiredofFEoritssubsidiaries.Thefollowing
tabledisclosestheadditionalcreditcontingentcontractualobligationsthatmayberequiredundercertaineventsasofDecember31,
2015:
