ComEd 2006 Annual Report Download - page 72

SFAS No. 143 requires that Generation estimate the fair value of its obligation for the future
decommissioning of its nuclear generating plants. To estimate that fair value, Generation uses a
probability-weighted, discounted cash flow model which considers multiple outcome scenarios based
upon significant estimates and assumptions embedded in the following:
Decommissioning Cost Studies. Generation uses decommissioning cost studies prepared by a
third party to provide a marketplace assessment of the costs and timing of decommissioning activities
which are validated by comparison to current decommissioning projects and other third-party
estimates. Decommissioning cost studies are updated, on a rotational basis, for each of Generation’s
nuclear units at a minimum of every five years.
Cost Escalation Studies. Generation uses cost escalation factors to escalate the
decommissioning costs from the decommissioning cost studies discussed above, which were prepared
using year-of-estimate amounts, through the decommissioning period for each of the units. Cost
escalation studies are used to determine escalation factors and are based on inflation indices for labor,
equipment and materials, energy and low-level radioactive waste disposal costs. Cost escalation
studies are updated on a periodic basis.
Probabilistic Cash Flow Models. Generation’s probabilistic cash flow models include the
assignment of probabilities to various cost, decommissioning alternative and timing scenarios.
Probabilities assigned to cost levels include an assessment of the likelihood of actual costs plus 20%
or minus 15% over the base cost scenario. Probabilities assigned to decommissioning alternatives
assess the likelihood of performing DECON (a method of decommissioning in which the equipment,
structures, and portions of a facility and site containing radioactive contaminants are removed and
safely buried in a low-level radioactive waste landfill or decontaminated to a level that permits property
to be released for unrestricted use shortly after the cessation of operations), Delayed DECON or
SAFSTOR (a method of decommissioning in which the nuclear facility is placed and maintained in such
condition that the nuclear facility can be safely stored and subsequently decontaminated to levels that
permit release for unrestricted use) procedures. Probabilities assigned to the timing scenarios
incorporate the likelihood of continued operation through current license lives or through anticipated
license renewals. Generation’s probabilistic cash flow models also include an assessment of the timing
of DOE acceptance of spent nuclear fuel for permanent disposal.
Discount Rates. The probability-weighted estimated future cash flows using these various
scenarios are discounted using credit-adjusted, risk-free rates applicable to the various businesses in
which each of the nuclear units originally operated.
Changes in the assumptions underlying the foregoing items could materially affect the
decommissioning obligation recorded with a corresponding change to the asset retirement cost (ARC)
asset. However, if an update to an ARO results in a decrease, and that unit does not have an
underlying ARC, that change in the ARO may be recognized in current period earnings. Changes in the
assumptions could affect future updates to the decommissioning obligation. For example, the 20-year
average cost escalation rates used in the latest ARO calculation were approximately 3% to 4%. A
uniform increase in these escalation rates of 25 basis points would increase the total ARO recorded by
Exelon by approximately 9% or more than $300 million. Under SFAS No. 143, the nuclear
decommissioning obligation is adjusted on a periodic basis due to the passage of time and revisions to
either the timing or amount of the original estimate of the future undiscounted cash flows required to
decommission the nuclear plants. For more information regarding the adoption and ongoing application
of SFAS No. 143, see Notes 1 and 13 of the Combined Notes to Consolidated Financial Statements.
Conditional ARO (Exelon, Generation, ComEd and PECO)
As of December 31, 2005, the Registrants adopted FIN 47. FIN 47 clarified that a legal obligation
associated with the retirement of a long-lived asset whose timing and/or method of settlement are
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