ComEd 2006 Annual Report Download - page 40

Discussion and Analysis of Financial Condition and Results of Operation—Exelon—Liquidity and
Capital Resources, may adversely affect the Registrants’ results of operations and cash flows and the
market prices of their publicly traded securities. While each of the Registrants believes it has identified
and discussed the key risk factors affecting its business, there may be additional risks and
uncertainties that are not presently known or that are not currently believed to be significant that may
adversely affect its performance or financial condition.
Generation
Market Transition Risks
Due to its dependence on two of its significant customers, ComEd and PECO, Generation will
be negatively affected in the event of non-performance or change in the creditworthiness of
either of its most significant customers.
Generation currently provides power under a PPA with PECO and supplier forward contracts with
ComEd to meet 100% of PECO’s electricity supply requirements and up to 35% of ComEd’s electricity
supply requirements. Consequently, Generation is highly dependent on ComEd’s and PECO’s
continued payments under these supplier forward contracts and the PPA and would be adversely
affected by negative events affecting these agreements, including the non-performance or a change in
the creditworthiness of either ComEd or PECO. A default by ComEd or PECO under these agreements
would have an adverse effect on Generation’s results of operations and financial position.
Generation’s business may be negatively affected by the restructuring of the energy industry.
Regional Transmission Organizations. Generation is dependent on wholesale energy markets
and open transmission access and rights by which Generation delivers power to its wholesale
customers, including ComEd and PECO. Generation uses the wholesale regional energy markets to
sell power that Generation does not need to satisfy its long-term contractual obligations, to meet long-
term obligations not provided by its own resources and to take advantage of price opportunities.
Wholesale markets have only been implemented in certain areas of the country and each market
has unique features, which may create trading barriers among the markets. Approximately 79% of
Generation’s generating resources, which include directly owned assets and capacity obtained through
long-term contracts, are located in the region encompassed by PJM. Generation’s future results of
operations, however, will depend on (1) FERC’s continued adherence to and support for policies that
favor the development of competitive wholesale power markets, such as the PJM market and (2) with
respect to PJM, the absence of material changes to market structure that limit or otherwise negatively
affect the competitiveness of the market.
Provider of Last Resort. PECO and ComEd have POLR obligations to meet their respective
retail customers’ energy supply needs. To enable it to fulfill that obligation through the end of 2010,
PECO has a full-requirements PPA with Generation. To fulfill its obligation for energy supply beginning
in 2007, ComEd has and will in the future conduct procurement auctions. In the first ICC-approved
procurement auction, 14 wholesale suppliers, including Generation, won the right to provide to ComEd
the energy supply it needs to serve its retail customers from January 1, 2007 through May 31, 2008.
Generation’s share of this supply is 35%.
Because retail customers in both Pennsylvania and Illinois can switch from PECO or ComEd to a
competitive electric generation supplier for their energy needs, planning to meet PECO’s obligation to
supply PECO with all of the energy PECO needs to fulfill its POLR obligation and to provide the supply
needed to serve Generation’s 35% share of the ComEd load is more difficult than planning for retail
load before the advent of retail competition. Before retail competition, the primary variables affecting
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