Exelon 2003 Annual Report Download - page 97

95Notes to Consolidated Financial Statements
EXELON CORPORATION AND SUBSIDIARY COMPANIES
NOTE 04 ‰REGULATORY ISSUES
ComEd
Delivery Service Rates. On March 3, 2003, ComEd entered into
and the ICC subsequently entered orders to implement, an
agreement (Agreement) with various Illinois retail market
participants and other interested parties that settled, among
other things, delivery service rates and the market value in-
dex proceeding and facilitates competitive service declara-
tions for large-load customers and an extension of the PPA
with Generation. The effect of the Agreement is lower com-
petitive transition charge (CTC) collections that ComEd
charges customers who take electricity from an alternative
retail electric supplier (ARES) or under the purchase power
option (PPO) through 2006. The Agreement also allows cus-
tomers to lock in current CTC charges for multiple years. A
non-party to the Agreement has appealed one of the ICC’s
orders which, if ultimately successful, may impact the
Agreement on a going-forward basis.
The annual market price adjustments to the CTC effec-
tive in June 2002 and the impacts of the Agreement in June
2003 had the effect of significantly increasing the CTC
charge in June 2002, and subsequently significantly re-
ducing the CTC charge in June 2003. In 2003 and 2002,
ComEd collected $304 million and $306 million in CTC rev-
enues, respectively. Based on the changes in the CTC as part
of the Agreement and on current assumptions about the
competitive price of delivered energy and customers’ choice
of electric supplier, ComEd estimates that CTC revenue will
be approximately $180 million to $200 million in each of the
years 2004 through 2006.
In 2003, ComEd recorded a charge to earnings associated
with the required funding of specified programs and ini-
tiatives associated with the Agreement of $51 million (before
income taxes) on a present value basis. This amount was
partially offset by the reversal of a $12 million (before income
taxes) reserve established in the third quarter of 2002 for a
potential capital disallowance in ComEd’s delivery services
rate proceeding and a credit of $10 million (before income
taxes) related to the capitalization of employee incentive
payments provided for in the delivery services order. The
charge of $51 million and the credit of $10 million were re-
corded in operating and maintenance expense and the re-
versal of the $12 million reserve was recorded in other, net
within Exelon’s Consolidated Statements of Income. The net
charge for these items was $29 million (before income taxes).
In accordance with the Agreement, ComEd made payments
of $23 million during 2003.
Customer Choice. All of ComEd’s retail customers are eligible
to choose an ARES and non-residential customers may also
buy electricity from ComEd at market-based prices under the
PPO. No alternative provider has chosen to serve ComEd’s
residential customers. As of December 31, 2003, about 20,300
non-residential customers, or 31% of ComEd’s annual retail
kilowatthour sales, had elected either the PPO or an ARES.
Customers who receive energy from an alternative supplier
continue to pay a delivery charge.
Customer Service Declarations. On November 14, 2002, the ICC
allowed ComEd, by operation of law, to revise its provider of
last resort obligation to be the back-up energy supplier at
market-based rates for customers with energy demands of
at least three megawatts. About 370 of ComEd’s largest en-
ergy customers are affected, representing an aggregate
supply obligation or load of approximately 2,500 megawatts.
These customers accounted for 10% of ComEd’s 2003 MWh
deliveries. These customers will not have a right to take
bundled service after June 2006 or to come back to bundled
rates if they choose an alternative supplier. The parties to the
Agreement have committed, if specified market conditions
exist, not to oppose a process to be initiated in June 2004
or thereafter for achieving a similar competitive declaration
for customers having energy demands of one to three
megawatts.
On March 28, 2003, the ICC approved changes to ComEd’s
real-time pricing tariff, which would be made available to
customers who choose not to go to the competitive market
to procure their electric power and energy. An appeal to each
of the ICC’s orders is pending and ComEd cannot predict the
outcome of those appeals.
Exelon cannot predict the long-term impact of customer
choice on results of operations.
Rate Reductions and Return on Common Equity Threshold.
The Illinois restructuring legislation as amended required a
15% residential base rate reduction effective August 1, 1998
and an additional 5% residential base rate reduction effec-
tive October 1, 2001. In addition, a base rate freeze, reflecting
the residential base rate reduction, is in effect through Jan-
uary 1, 2007. A utility may request a rate increase during the
rate freeze period only when necessary to ensure the utility’s
financial viability. Under the Illinois legislation, if the two-
year average of the earned return on common equity of a
utility through December 31, 2006 exceeds an established
threshold, one-half of the excess earnings must be refunded
to customers. The threshold rate of return on common
equity is based on a two-year average of the Monthly Treas-
ury Bond Long-Term Average Rates (25 years and above) plus
8.5% in the years 2000 through 2006. Earnings for purposes
of ComEd’s threshold include ComEd’s net income calculated
in accordance with GAAP and reflect the amortization of
regulatory assets. As a result of the Illinois legislation, at
December 31, 2003, ComEd had a regulatory asset with an
unamortized balance of $131 million that it expects to fully
recover and amortize by the end of 2006. ComEd did not