Exelon 2014 Annual Report Download - page 205

Combined Notes to Consolidated Financial Statements—(Continued)
(Dollars in millions, except per share data unless otherwise noted)
On December 17, 2010, ComEd entered into several 20-year floating-to-fixed energy swap contracts with unaffiliated suppliers for
the procurement of long-term renewable energy and associated RECs. Delivery under the contracts began in June 2012. Pursuant
to the ICC’s Order on December 19, 2012, ComEd’s commitments under the existing long-term contracts for energy and associated
RECs were reduced for the June 2013 through May 2014 procurement period. In addition, the ICC’s December 18, 2013 Order
approved the reduction of ComEd’s commitments under those contracts for the June 2014 through May 2015 procurement period,
and the amount of the reductions was approved in March 2014. These contracts are designed to lock in a portion of the long-term
commodity price risk resulting from the renewable energy resource procurement requirements in the Illinois Settlement Legislation.
ComEd has not elected hedge accounting for these derivative financial instruments. ComEd records the fair value of the swap
contracts on its balance sheet. Because ComEd receives full cost recovery for energy procurement and related costs from retail
customers, the change in fair value each period is recorded by ComEd as a regulatory asset or liability. See Note 3—Regulatory
Matters for additional information.
PECO has contracts to procure electric supply that were executed through the competitive procurement process outlined in its
PAPUC-approved DSP Programs, which are further discussed in Note 3—Regulatory Matters. Based on Pennsylvania legislation
and the DSP Programs permitting PECO to recover its electric supply procurement costs from retail customers with no mark-up,
PECO’s price risk related to electric supply procurement is limited. PECO locked in fixed prices for a significant portion of its
commodity price risk through full requirements contracts and block contracts. PECO has certain full requirements contracts and
block contracts that are considered derivatives and qualify for the NPNS scope exception under current derivative authoritative
guidance.
PECO’s natural gas procurement policy is designed to achieve a reasonable balance of long-term and short-term gas purchases
under different pricing approaches in order to achieve system supply reliability at the least cost. PECO’s reliability strategy is two-
fold. First, PECO must assure that there is sufficient transportation capacity to satisfy delivery requirements. Second, PECO must
ensure that a firm source of supply exists to utilize the capacity resources. All of PECO’s natural gas supply and asset management
agreements that are derivatives either qualify for the NPNS scope exception and have been designated as such, or have no mark-to-
market balances because the derivatives are index priced. Additionally, in accordance with the 2014 PAPUC PGC settlement and to
reduce the exposure of PECO and its customers to natural gas price volatility, PECO has continued its program to purchase natural
gas for both winter and summer supplies using a layered approach of locking-in prices ahead of each season with long-term gas
purchase agreements (those with primary terms of at least twelve months). Under the terms of the 2014 PGC settlement, PECO is
required to lock in (i.e., economically hedge) the price of a minimum volume of its long-term gas commodity purchases. PECO’s gas-
hedging program is designed to cover about 30% of planned natural gas purchases in support of projected firm sales. The hedging
program for natural gas procurement has no direct impact on PECO’s financial position or results of operations as natural gas costs
are fully recovered from customers under the PGC.
BGE has contracts to procure SOS electric supply that are executed through a competitive procurement process approved by the
MDPSC. The SOS rates charged recover BGE’s wholesale power supply costs and include an administrative fee. The administrative
fee includes an incremental cost component and a shareholder return component for commercial and industrial rate classes. BGE’s
price risk related to electric supply procurement is limited. BGE locks in fixed prices for all of its SOS requirements through full
requirements contracts. Certain of BGE’s full requirements contracts, which are considered derivatives, qualify for the NPNS scope
exception under current derivative authoritative guidance. Other BGE full requirements contracts are not derivatives.
BGE provides natural gas to its customers under a MBR mechanism approved by the MDPSC. Under this mechanism, BGE’s actual
cost of gas is compared to a market index (a measure of the market price of gas in a given period). The difference between BGE’s
actual cost and the market index is shared equally between shareholders and customers. BGE must also secure fixed price
contracts for at least 10%, but not more than 20%, of forecasted system supply requirements for flowing (i.e., non-storage) gas for
the November through March period. These fixed-price contracts are not subject to sharing under the MBR mechanism. BGE also
ensures it has sufficient pipeline transportation capacity to meet customer requirements. All of BGE’s natural gas supply and asset
management agreements qualify for the NPNS scope exception and result in physical delivery.
Proprietary Trading. Generation also enters into certain energy-related derivatives for proprietary trading purposes. Proprietary
trading includes all contracts entered into with the intent of benefiting from shifts or changes in market prices as opposed to those
entered into with the intent of hedging or managing risk. Proprietary trading activities are subject to limits established by Exelon’s
RMC. The proprietary trading activities, which included settled physical sales volumes of 10,571 GWh, 8,762 GWh and 12,958 GWh
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