Market Development: A ComEd Perspective

1. Market Development:A ComEd Perspective Presentation to the Midwest Cogeneration Association November 20, 2002 Stephan H. Baab Manager – Technical Services, Commonwealth Edison Co.

2. Tonight’s Discussion • Background • Integrated Distribution Company Model • Retail Markets • Wholesale Markets • Distribution Markets • What does this mean to the MCA?

3. Background Until very recently, ComEd was a vertically integrated utility • Owned transmission, generation, and a retail business. • Entitled to revenues based on “used and useful” assets. • Had limited rate options which applied to large numbers of customers. • Worked to promote electric throughput and retain customers. • Owned a 99.9% market share.

4. Background All that changed due to the 1997 Restructuring Act • Bundled rates frozen through Jan 1, 2005 at 1994 rates • 20% residential rate decrease • Customers can purchase electricity from • Alternative Retail Electric Suppliers (ARES) • Unbundled through the Power Purchase Option (PPO) • Bundled through tariffed rates (ComEd 6L, 6T, etc…) • Customer Transition Charge (CTC) established for customers that switch • ComEd is the Provider of Last Resort (POLR) • ComEd had the choice to Functionally Separate and be able to market our electricity or become an Integrated Distribution Company (IDC) and remain supplier neutral.

5. What is an IDC? • ComEd has chosen to the follow the Integrated Distribution Company Model • ComEd’s business focus is essentially a transmission and distribution company. • Ensures that ComEd does not have an unfair competitive advantage over a Retail Electric Supplier (RES). • All requests for transmission and distribution services shall be processed in a non-discriminatory manner. • “ComEd shall not discriminate in matters relating to curtailment, interconnection, service restoration, repair work, distribution upgrading, scheduling, priority, balancing, or transmission and distribution services availability, price or service quality. • If ComEd offers a rate discount, rebate or waives a fee on any delivery, transmission or distribution service of customers of its retail electric supply services, that same offer must be made available to customers of alternative retail electric suppliers.

6. ComEd’s Market Position • ComEd has been committed to the development of robust competition and becoming a reliable provider of delivery services. • ComEd has not been competing with alternative suppliers to retain customers and has chosen to follow the Integrated Distribution Company (IDC) model. • Having divested its generation facilities to promote wholesale market development, ComEd must make decisions in the near future regarding what type of supply arrangements to make to meet its Provider of Last Resort (POLR) obligations. • ComEd is currently meeting its POLR service obligations through a Power Purchase Agreement (“PPA”) with Exelon Generation. • Through December 31, 2004, the PPA provides ComEd’s full power requirements at a fixed price. • Between January 1, 2005 and December 31, 2006, ComEd is only entitled to the capacity of its former nuclear plants at market-based rates. • Any load not covered by the PPA after 2004 must be procured through other arrangements.

7. Provider of Last Resort • In states that have restructured their electric industries, there is typically a entity designated to provide electric service to customers that do not obtain their energy from an alternative supplier. These entities are commonly known as the Provider of Last Resort or POLR. • In Illinois, electric utilities are the POLR. • Under the 1997 Act, utilities must continue to offer existing services pursuant to regulated tariffs to all customers--regardless of whether the customer remains with the utility or is returning to the utility from an alternative supplier. 220 ILCS 5/16-103. • There are several conditions imposed on the rates for POLR services. • The rates for POLR service are effectively frozen at 1994 levels for all customers through 2006, the end of the “transition period,” with a 20% residential rate reduction. 220 ILCS 5/16-111(a) and (b). • After 2006, POLR service rates may be capped by the ICC at the lower of cost or the market value plus 10%. 220 ILCS 5/16-111(i).

8. Competitive Declaration Petition • Although competition is currently doing well in Northern Illinois, particularly for large customers, the changes made to POLR will allow the market to move to the next level. • ICC deemed ComEd’s Rate 6L competitive for its largest customers, with peak period demands of 3 MW and greater. See 220 ILCS 5/16-113. • There were 373 Rate 6L customers with on-peak demands of 3 MW or more in at least three months of 2001, representing over 20% of annual non-residential sales. • These large customers will be encouraged to acquire energy through alternative suppliers. • An existing Rate 6L customer will be able to continue to take Rate 6L for a maximum of 3 years after the June 2003 billing period (i.e., June 2006). • Customers electing delivery service or another available tariff after the June 2003 billing cycle will not be allowed to return to Rate 6L. Rate 6L also will not be available to new customers after June 2003. • Rate HEP, a market-based hourly energy service, will continue to be available to customers as they transition to market supplies.

9. Highlights of the Filing • In addition to Rate 6L itself, the eligibility for service underseveral other related tariffs are affected by the declaration of Rate 6L as competitive for customers with demands of 3 MW and greater, including: • Rider 13 - Governmental Pumping Service • Rider 25 - Electric Space Heating • Rider 26 - Interruptible Service • Rider 27 - Displacement of Self-generation • Rider 30 - Interruptible/Curtailable Service • Rider 32 - Curtailable Service Cooperative • Among the related tariffs that are unaffected by the filing are Rider GCB - Governmental Consolidated Billing, Rate IPP - Independent Power Producer Service and Rate 18 – Standby Service.

10. Evidence Supporting the Filing • Given the current state of competition within the ComEd control area, the time is right to redefine the POLR obligation and create certainty in the market. • A plentiful wholesale supply outlook with diverse ownership and fuel mixes. • A transmission system that continues to accommodate competitive deliveries. • Burgeoning retail activity, particularly at the 1 MW and over customer level.

11. Wholesale Supplies Are Available . . . • Between 1999 and 2001, IPPs constructed 5,000 MW of new generation in ComEd’s service territory • In 2002, another 3,500 MW of IPP generation is on-line. • An additional 4,300 MW of IPP generation is in the queue for service by the end of 2004?????

12. Wholesale Supplies Are Sufficient . . . • Including generation formerly owned by ComEd, it is expected that there will be over 33,000 MW of generation in Northern Illinois by the end of 2004.

13. Wholesale Market Summary • Market development is stimulated by encouraging large customers to directly rely on the market for energy supply (i.e., reducing ComEd’s roles as a market intermediary). • With hourly spot-market pricing as the default service, large customers are encouraged to enter the market to hedge their power prices. • ComEd filed revisions to Rider PPO on October 1, 2002, that would change the time period when customers may select the PPO. • Regional wholesale activity is enhanced. • Capacity used by ComEd can be returned to the market for sale to others. • The increased amount of load supplied by RESs has allowed ComEd’s full-requirements supplier, Exelon Generation, to return 2,684 MW of valuable baseload and intermediate capacity to the market. • The petition creates certainty for all market participants as we approach the end of the transition period. • With ComEd’s recent decision to join PJM, the outlook for transmission is increasingly positive.

14. Reliable Provider of Delivery Services • ComEd ends a third straight summer without major incident. The company established a three-year track record of improved reliability with its hottest and toughest summer since 1999. • This summer, for the second year in a row, ComEd was tested by high temperatures, including • 21 days of temperatures 90 degrees or higher compared to 18 days in 2001, 2 days in 2000, and 18 days in 1999. • 9 days of peak loads greater than 20,000 megawatts, compared to 7 days in 2001, 2 such days in 2000 and 3 such days in 1999 • Set an all-time new peak demand record of 21,804 on August 1, 2002 eclipsing last year’s demand record of 21,574 megawatts set on Aug. 9, 2001. • ComEd continued to demonstrate improved reliability on days of high usage, when demand is extremely high, greater than 20,00 megawatts.

15. ComEd Customers Have Fewer and Shorter Outages

16. 79% of ComEd Customers Had Zero or One Outage in 2002*

17. Significant Improvements Made, We Are Not Done Yet • ComEd is completing plans for Summer 2003 Projects, including work to improve and increase transmission capacity and reliability of service throughout the system, such as the installation of new cables in Chicago, and a major upgrade to transmission lines serving the northern part of the territory. • ComEd will improve system reliability substantially through the continuation of its automation program to install Supervisory Control and Data Acquisition (SCADA) devices and switches on ComEd’s 34,000-volt lines. This monitoring system allows us to remotely monitor load variations on the lines; the switches installed on the lines are triggered automatically to isolate problems on lines when they occur.

18. Reliability Remains ComEd’s #1 Job • Projects are in development to increase distribution capacity by upgrading or installing additional equipment and transformers required for system flexibility and transferring load at ComEd’s substations throughout the service territory: • Bradley/Kankakee/Bourbonnais • Shorewood/Joliet • New Lenox/Mokena • Carol Stream/Winfield/Wheaton • Rolling Meadows/Arlington Heights/Elk Grove Village • Rockford/Machesney Park/Loves Park/Roscoe • North Aurora/Aurora • Chicago (Far South Side – Hegewisch) • “In 1999, ComEd launched a massive improvement effort promising our customers to improve reliability. And we kept that promise. But we recognize that maintaining reliability is a continuous job. That’s why it remains our number one priority. THE WORK CONTINUES….”

19. What Does This Mean To MCA members • ComEd’s position regarding customers who wish to install on-site or cogeneration systems is neutral. • The baseline of customer energy savings is no longer 6L. • Customers have a variety of stand-by options. • Future electricity prices will be as difficult to forecast as gas prices. • Reliability has increased for our customers.

20. Questions?

21. Concluding Remarks • ComEd recognizes that POLR services can be a major challenge--if not handled properly. “Perceptive utility executives like Exelon’s John Rowe worry that having to be the Supplier of Last Resort will hang a millstone around the neck of distribution utilities and interfere with or seriously impede the introduction of competition to the electric utility industry.” (Energy Perspective, June 14, 2001.) • Absent ComEd’s proposal, we run the risk of competition failing in the Illinois marketplace. • Sustainable market development cannot occur with the uncertainty created by the fixed-price option that Rate 6L and other tariffs create. • ComEd’s proposed filing may be considered bold by some, but the conditions in the large customer market support the competitive declaration. It is an affirmative step we can take toward sustainable market development and rate stability in ComEd’s service area.