ComEd 2006 Annual Report Download - page 34

Extreme weather. Generation incorporates contingencies into its planning for extreme weather
conditions, including potentially reserving capacity to meet summer loads at levels representative of
warmer-than-normal weather conditions.
Wholesale energy market prices. Generation is exposed to commodity price risk associated with
the unhedged portion of its electricity trading portfolio. Generation enters into derivative contracts,
including forwards, futures, swaps, and options, with approved counterparties to hedge this anticipated
exposure. Generation has hedges in place that significantly mitigate this risk for 2007 and 2008.
However, Generation is exposed to relatively greater commodity price risk in the subsequent years for
which a larger portion of its electricity portfolio may be unhedged. Generation has been and will
continue to be proactive in using hedging strategies to mitigate this risk in subsequent years as well.
Generation has estimated a greater than 90% economic and cash flow hedge ratio for 2007 for its
energy marketing portfolio.
The PPA between Generation and PECO expires at the end of 2010. Market prices for electricity
have generally increased significantly over the past few years due to the rise in natural gas and fuel
prices. As a result, PECO customers’ generation rates are below current wholesale energy market
prices, and Generation’s margins on sales in excess of ComEd’s and PECO’s requirements have
improved due to its significant capacity of low-cost nuclear generating facilities. Generation’s ability to
maintain those margins will depend on future fossil fuel prices and its ability to obtain high capacity
factors at its nuclear plants.
Commodity prices. Generation’s Power Team manages the output of Generation’s assets and
energy sales to optimize value and reduce the volatility of Generation’s earnings and cash flows.
Generation attempts to manage its exposure through enforcement of established risk limits and risk
management procedures.
ComEd and PECO
Post-transition rates. In 2006, ComEd received orders from the ICC in several regulatory
proceedings to establish the rates to be charged to customers effective January 2007. The first order
relates to ComEd’s ability to procure electricity supply. The second order and the associated order on
rehearing established the delivery service rates that will be charged to customers. Appeals are pending
related to each order. A third order allows ComEd’s residential customers to have the choice to elect to
defer any electric rate increases over 10% in each of the years 2007 to 2009. Any deferred balances
will accrue interest and, in general, will be collected in 2010 to 2012 with a carrying charge of
3.25% per year beginning at the time of deferral.
While PECO has made no regulatory filings to date to revise its transmission and distribution rates
established in 2000, PECO will continue to work with Federal and state regulators, state and local
governments, customer representatives and other interested parties to develop appropriate processes
for establishing future rates in restructured electricity markets. PECO will strive to ensure that future
rate structures recognize the substantial improvements PECO has made, and will continue to make, in
its transmission and distribution systems. PECO will also work to ensure that its post-2010 retail
generation rates are adequate to cover its costs of obtaining electricity from its suppliers, which could
include Generation.
Mandatory RPS. ComEd expects to recover from customers any increased costs associated with
RPS legislation if enacted. PECO is responsible for meeting its RPS requirements and, in that regard,
plans to file with the PAPUC in the first quarter of 2007 a proposal to purchase renewable energy
credits commencing as early as 2008. PECO expects to recover from customers all costs associated
with RPSs. The Registrants are currently evaluating the potential impacts of RPS legislation on their
businesses.
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