ComEd 2003 Annual Report Download - page 32

30 Management’s Discussion and Analysis of Financial Condition and Results of Operations
EXELON CORPORATION AND SUBSIDIARY COMPANIES
service to customers in their service territories at fixed rates,
or in some instances, market-derived rates. In addition, cus-
tomers who take service from an alternative generation
supplier may later return to ComEd or PECO, provided, how-
ever, that under Illinois law, ComEd’s obligation to provide
generation may be eliminated over time if the ICC finds that
competitive supply options are available to certain classes of
customers. ComEd and PECO remain obligated to provide
transmission and distribution service to all customers
regardless of their generation suppliers. The number of
customers taking service from alternative generation
suppliers depends in part on the prices being offered by
those suppliers relative to the fixed prices that ComEd and
PECO are authorized to charge by their state regulatory
commissions. To the extent that customers leave traditional
bundled tariffs and select a different generation supplier,
Energy Delivery’s revenues are likely to decline, and our rev-
enues and gross margins could vary from period to period.
Energy Delivery continues to serve as the POLR for energy for
all customers in its service territories. Since ComEd and PECO
customers can “switch,” that is, within limits they can choose
an alternative generation supplier and then return to us and
then go back to an alternative supplier, and so on, planning
for Energy Delivery has a higher level of uncertainty than
that traditionally experienced due to weather and the
economy. Energy Delivery has no obligation to purchase
power reserves to cover the load served by others. We man-
age our POLR obligation through full-requirements contracts
with Generation, under which Generation supplies the
power requirements of ComEd and PECO.
ComEd has received ICC approval to phase out its obliga-
tion to provide fixed-price energy under bundled rates to
approximately 350 of its largest energy customers, which
ComEd believes partially mitigates its risk. These are
commercial and industrial customers, including heavy in-
dustrial plants, large office buildings, government facilities
and a variety of other businesses with demands of at least
three MWs representing an aggregate of approximately
2,500 MWs of load. These customers accounted for 10% of
ComEd’s 2003 MWh deliveries.
Weather affects electricity and gas usage and, consequently,
Energy Delivery’s results of operations.
Temperatures above normal levels in the summer tend to
further increase summer cooling electricity demand and
revenues, and temperatures below normal levels in the win-
ter tend to further increase winter heating electricity and
gas demand and revenues. Because of seasonal pricing
differentials, coupled with higher consumption levels, we
typically report higher revenues in the third quarter of our
fiscal year. However, extreme summer conditions or storms
may stress our transmission and distribution systems,
resulting in increased maintenance costs and limiting our
ability to meet peak customer demand. These extreme con-
ditions may have detrimental effects on our operations.
Economic conditions and activity in Energy Delivery’s service
territories directly affect the demand for electricity.
Higher levels of development and business activity generally
increase the number of customers and their average use of
energy. Periods of recessionary economic conditions may
adversely affect our results of operations. In the near term,
retail sales growth on an annual basis is expected to be 1.2%
and 1.3% in the service territories of ComEd and PECO,
respectively. Long-term retail sales growth for electricity is
expected to be 1.5% and 1.0% per year for ComEd and
PECO, respectively.
Energy Delivery’s business is affected by the restructuring of
the energy industry.
The electric utility industry in the United States is in tran-
sition. As a result of both legislative initiatives as well as
competitive pressures, the industry has been moving from a
fully regulated industry, consisting primarily of vertically in-
tegrated companies that combine generation, transmission
and distribution, to a partially restructured industry, consist-
ing of competitive wholesale generation markets and con-
tinued regulation of transmission and distribution. These
developments have been somewhat uneven across the states
as a result of the reaction to the problems experienced in Cal-
ifornia in 2000, the August Blackout and the publicized prob-
lems of some energy companies. Both Illinois and
Pennsylvania have adopted restructuring legislation de-
signed to foster competition in the retail sale of electricity. A
large number of states have not changed their regulatory
structures.
Regional Transmission Organizations and Standard Market
Platform. The FERC has required jurisdictional utilities to
provide open access to their transmission systems. It has also
sought the voluntary development of RTOs and the elimi-
nation of trade barriers between regions. The FERC also pro-
posed rulemakings to implement protocols to create a
standard wholesale market platform for the wholesale mar-
kets for energy and capacity. The RTO would become the
provider of the transmission service, and the transmission
owners would recover their revenue requirements through
it. The transmission owners would remain responsible for
maintaining and physically operating their transmission fa-
cilities. The wholesale market platform proposal would also
require RTOs to operate an organized bid-based wholesale
market for those who wish to sell their generation through
the market and to manage congestion on transmission lines
preferably by means of a financially based system known as
“locational marginal pricing.” FERC is likely to finalize its
wholesale market platform rule during 2004.