Exelon 2014 Annual Report Download - page 51

market offers. While offers are expected to put upward pressure on capacity clearing prices, operational improvements made as a
result of PJM’s proposal are expected to improve reliability, to reduce energy production costs as a result of more efficient operations
and to reduce the need for out of market energy payments to suppliers. Exelon participated actively in PJM’s stakeholder process
through which PJM developed the proposal and is also actively participating in the FERC proceeding including filing comments. PJM
asked for a FERC order approving the proposal by April 1, 2015 so PJM can implement the proposal prior to its next capacity auction
in May 2015. However, it is not clear when or how the FERC will respond to PJM’s proposal or, if it responds within PJM’s
timeframe, whether FERC will require changes.
Subsidized Generation. The rate of expansion of subsidized generation, including low-carbon generation such as wind and solar
energy, in the markets in which Generation’s output is sold can negatively impact wholesale power prices, and in turn, Generation’s
results of operations.
Various states have attempted to implement or propose legislation, regulations or other policies to subsidize new generation
development which may result in artificially depressed wholesale energy and capacity prices. For example, the New Jersey
legislature enacted in to law in January 2011, the Long Term Capacity Pilot Program Act (LCAPP). LCAPP provides eligible
generators with 15-year fixed contracts for the sale of capacity in the PJM capacity market. Under LCAPP, the local utilities in New
Jersey are required to pay (or receive) the difference between the price eligible generators receive in the capacity market and the
price guaranteed under the 15-year contract. New Jersey ultimately selected three proposals to participate in LCAPP and build new
generation in the state. In addition, on April 12, 2012, the MDPSC issued an order directing the Maryland electric utilities to enter into
a 20-year contract for differences (CfD) with CPV Maryland, LLC (CPV), under which CPV will construct an approximately 700 MW
combined cycle gas turbine in Waldorf, Maryland, that it projected will be in commercial operation by June 1, 2015. CPV has
subsequently sought to extend that date. The CfD mandated that utilities (including BGE) pay (or receive) the difference between
CPV’s contract price and the revenues it receives for capacity and energy from clearing the unit in the PJM capacity market.
Exelon and others have challenged the constitutionality and other aspects of the New Jersey legislation and the actions taken by the
MDPCS in state and federal courts. Ultimately, the Exelon parties prevailed in obtaining orders from the U.S. Court of Appeals for
the Third Circuit and the U.S. Court of Appeals for the Fourth Circuit effectively undoing the actions taken by the New Jersey
legislature and the MDPSC respectively. The matter has been appealed to the U.S. Supreme Court, and while the Court of Appeals
decisions are helpful, there remains risk the Supreme Court will overrule the lower Courts.
As required under their contracts, generator developers who were selected in the New Jersey and Maryland programs (including
CPV) offered and cleared in PJM’s capacity market auctions held in May 2012, 2013, and 2014. In addition, CPV has announced its
intention to move forward with construction of its New Jersey and Maryland plants, with or without the challenged state
subsidy. Nonetheless to the extent that the state-required customer subsidies are included under their respective contracts, Exelon
believes that these projects may have artificially suppressed capacity prices in PJM in these auctions and may continue to do so in
future auctions to the detriment of Exelon’s market driven position. While the court decisions in New Jersey and Maryland are
positive developments, continuation of these state efforts, if successful and unabated by an effective minimum offer price rule
(MOPR) for future capacity auctions, could continue to result in artificially depressed wholesale capacity and/or energy prices. Other
states could seek to establish programs, which could substantially impact Exelon’s market driven position and could have a
significant effect on Exelon’s financial results of operations, financial position and cash flows. Exelon continues to monitor
developments and participate in stakeholder and other processes to ensure that similar state subsidies are not developed. In
addition, Exelon remains active in advocating for competitive markets, while opposing policies that require taxpayers and/ or
consumers to subsidize or give preferential treatment to specific generation providers or technologies, or that would threaten the
reliability and value of the integrated electricity grid.
See Note 3—Regulatory Matters of the Combined Notes to Consolidated Financial Statements for additional information on the
Maryland Order.
Energy Demand. Modest economic growth partially offset by energy efficiency initiatives is resulting in positive growth for electricity
for ComEd and PECO, and no projected growth for electricity for BGE. ComEd, PECO and BGE are projecting load volumes to
increase by 0.4%, 0.8% and (0.2)%, respectively, in 2015 compared 2014.
Retail Competition. Generation’s retail operations compete for customers in a competitive environment, which affect the margins
that Generation can earn and the volumes that it is able to serve. The market experienced high price volatility in the first quarter of
2014 which contributed to bankruptcies and consolidations within the industry during the year. However, forward natural gas and
power prices are expected to remain low and thus we expect retail competitors to stay aggressive in their pursuit of market share,
and that wholesale generators (including Generation) will continue to use their retail operations to hedge generation output.
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