Exelon 2002 Annual Report Download - page 28

but who have the common objective of limiting rate increases.
The proceedings also involve various contested issues of law
and fact and have a bearing upon the recovery of Energy
Delivery’s costs through regulated rates. During the course of
the proceedings,we look for opportunities to resolve contested
issues in a manner that grant some certainty to all parties to
the proceedings as to rates and energy costs.
ComEd Delivery Services Rate Case.ComEd is authorized to charge
customers who purchase electricity from an alternative sup-
plier for the use of its distribution system to deliver that elec-
tricity. These delivery service rates are set through proceedings
before the ICC based upon, among other things, the operating
costs associated with ComEd’s distribution system and the cap-
ital investment that ComEd has made in its distribution system.
In April 2002, the ICC issued an interim order that set delivery
rates for ComEd’s residential customers. The interim order was
subject to an audit of test year (2000) expenditures, including
capital expenditures.In October 2002,the ICC received the report
on the audit of the test year expenditures by a consulting firm
engaged by the ICC to perform the audit. The consulting firm
recommended certain additional disallowances to test year
expenditures and rate base levels. ComEd does not expect any
change in delivery service rates to have a significant impact on
results of operations in 2003. However, the estimated potential
investment write-off, before income taxes, could be up to
approximately $100 million if the ICC ultimately determines
that all or some portion of ComEd’s distribution plant is not
recoverable through rates. In 2002, ComEd recorded a charge to
earnings, before income taxes, of $12 million representing the
estimated minimum probable exposure. ComEd is in negotia-
tions with several parties to resolve the delivery service case.
We must maintain the availability and reliability of Energy
Delivery’s delivery systems to meet customer expectations.
Each year increases in both customers and the demand for energy
requires expansion and reinforcement of delivery systems to
increase capacity and maintain reliability. Failures of the equip-
ment or facilities used in those delivery systems could poten-
tially interrupt energy delivery services and related revenues,
and increase repair expenses and capital expenditures. Such
failures, including prolonged or repeated failures, also could
affect customer satisfaction and may increase regulatory
oversight and the level of our maintenance and capital expendi-
tures. In addition, under Illinois law, ComEd can be required to
pay damages to its customers in the event of extended outages
affecting large numbers of its customers.
We must manage Energy Delivery’s costs due to the rate and
equity return limitations imposed on Energy Delivery’s revenues.
Rate freezes and caps in effect at ComEd and PECO currently
limit Energy Delivery’s ability to recover increased expenses and
the costs of investments in new transmission and distribution
facilities. As a result, our future results of operations will
depend on the ability of ComEd and PECO to deliver electricity
and, in the case of PECO, natural gas,in a cost-efficient manner,
and to realize cost savings to offset increased infrastructure
investments and inflation.
Rate limitations. ComEd is subject to a legislatively mandated
rate freeze on bundled retail rates that will remain effective
until January 1,2007.PECO is subject to agreed-upon rate reduc-
tions of $200 million, in aggregate,for the period 2002 through
2005 and caps (subject to limited exceptions for significant
increases in Federal or state income taxes or other significant
changes in law or regulation that do not allow PECO to earn a
fair rate of return) on its transmission and distribution rates
through December 31,2006 as a result of settlements previously
reached with the PUC.
Equity return limitation. ComEd is subject to a legislatively
mandated cap on its return on common equity through the end
of 2006. The cap is based on a two-year average of the U.S.
Treasury long-term rates (25 years and above) plus 8.5%, and is
compared to a two-year average return on ComEd’s common
equity. The legislation requires customer refunds equal to one-
half of any excess earnings above the cap. ComEd is allowed
to include regulatory asset amortization in the calculation of
earnings. ComEd has not triggered the earnings provision and
currently does not expect to trigger the earnings sharing provi-
sion in the years 2003 through 2006.
Energy Delivery has and will lose energy customers to other
generation service providers, although it continues to provide
delivery services and may have an obligation to provide
generation service to those customers.
The revenues of our Energy Delivery business will vary because of
customer choice of generation suppliers. As a result of restruc-
turing initiatives in Illinois and Pennsylvania, all of Energy
Delivery’s retail electric customers can choose to purchase their
generation supply from alternative suppliers. If customers do
not choose an alternative generation supplier or take service
under ComEd’s PPO, ComEd and PECO are each currently gener-
ally obligated to provide generation and delivery service to
customers in their service territories at fixed rates, or in some
Management’s Discussion and Analysis of Financial Condition and Results of Operations
exelon corporation and subsidiary companies
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