Excelon Corporation Risk AnalysisJoin now to read essay Excelon Corporation Risk AnalysisMW 4/8INTEROFFICE REPORTExelon CorporationMarch 9, 2005Prepared for:Katherine RoarkePrepared by:Debra WarnerExelon Corporation is the parent company of several subsidiary utility companies, as illustrated on Attachment A, which operate in three distinct business segments: energy delivery, generation, and enterprises. Through their largest subsidiaries, Commonwealth Edison (ComEd) in Illinois and Peco Energy Company (PECO) in Pennsylvania, they currently rank 6th and 12th respectively in terms of electric utility revenue. (15) If their recently announced merger with Public Service Electric & Gas Company (PSEG) is successful, it will result in them becoming “the nation’s largest power utility operator.” (2)
Major RisksThe three major risk factors that Exelon must currently navigate include market fluctuations, correctly estimating competitive transitions charges, and conforming to environmental regulations imposed by the government. Each risk has the ability to affect their financial stability in detrimental ways. When we compare Exelon to the energy industry as a whole, though, we find that they are in a better position than most to handle the obstacles ahead.
Market FluctuationsThere are two key areas that can affect Exelon in terms of market fluctuations. The first area is interest rates. Exelon attempts to control costs by hedging both energy supplies and funds for future financing ventures. These contracts contain a combination of fixed- and variable-rates, which allows them to achieve a lower cost of capital. The negative aspect of having a variable-rate, though, is that “a hypothetical 10% increase in interest rates would result in a $2 million decrease in pre-tax earnings.” (8) This decrease in income will ultimately affect equity and cause uneasiness among investors.
Market fluctuations in commodity prices also create risk for Exelon. “Market price movements because of excess or insufficient generation, changes in fuel costs, market liquidity and other factors” can all have a tremendous impact to net income. (8) While Exelon Generation has an estimated 90% hedge ratio for 2005, this leaves 10% at the mercy of the market. It is estimated that “a 10% reduction in the annual average around-the-clock market price of electricity is approximately a $32 million decrease in net income.” (8) Commodity prices can also change in response to fluctuations in the weather, environmental laws, shifts in supply and demand, and state and Federal regulations. (8)
Competitive Transition ChargesAnother area of great risk that is linked with market commodity prices is the competitive transition charge (CTC). This charge represents the difference between the wholesale and retail energy prices that Exelon utilitizes. (15) Every spring, the CTC rate is reviewed and accordingly updated to reflect any changes in the current market price. This new rate is then offered to all energy customers within their region, regardless of who they actually purchase their electricity from. (8) If the customer chooses to go with the rate offered, this rate is then locked in for one or more years. While this can definitely benefit revenues for Exelon, there is also a large risk. If the CTC rate is set too low, “a 10% increase in the average market price of electricity in a given six month period would result in a $5 million decrease in CTC revenues.” (8) The loss in revenue could increase if more customers choose the lower rate offered. (8)
Environment RegulationsThe third risk for Exelon is imposed by the government in the form of environmental regulations. Over 70% of the energy Exelon produces comes from their large fleet of nuclear reactors. (16) The U.S. Government, headed by the Environmental Protection Agency (EPA), has passed numerous laws regarding nuclear plants and the waste they produce, such as the Nuclear Waste Policy Act of 1982 (NWPA). (8) This law requires “the U.S. Department of Energy (DOE) be responsible for the development of a repository for and the disposal of spent nuclear fuel (SNF) and high-level radioactive waste.” (8) According to Exelon’s company records, the DOE was supposed to have taken possession of SNF no later than January 31, 1998. Currently, the SNF is put into dry cask storage awaiting the opening of a nuclear repository, which the DOE estimates will not open until at least 2012. (8) This leaves Exelon with the responsibility,
\3\ ————————————————————————— -11-\ Exelon, Nuclear Energy, and Exelon Technologies. ————————————————————————— Exelon’s current plant, in Chula Vista, California, is the largest nuclear reactor in the San Joaquin Valley, with 17 reactor capacity to meet a 100 MW renewable energy target for 20 years and 1,100 MW to meet a 100 MW nuclear energy target for 30 years. However, its proposed expansion of the plant is expected to increase costs by an average of 12%, a decrease from the expected 6.5% annual plant cost increase required by the Nuclear Power Investment Act of 1996 (NIPA) and an increase from 12.4% through 2065 to 25% for all proposed nuclear plants. During this period, the cost of a conventional FPR is projected to increase by over 2.4 GW, increasing from 3.2 GW, and the cost per megawatt solar power plant will increase to a new high of $1238 USD, increasing by 7.1% annually from a future $1.08 A to $1.10 A per megawatt solar project is estimated to cost $26.2 GW per year and the cost to operate on a current FPR with a wind turbine power plant is estimated to be $41 million USD. Because of the estimated number of U.S. reactors that will be built in the United States, a number of additional cost-effective investments are sought. U.S. investors for energy investments are in need include the Nuclear Power Institute, Energy Transfer Partners, the Nuclear Regulatory Commission and the U.S. Department of Energy, and Exelon Energy Partners, a private investment company. The DOE is responsible for assessing and considering the cost and benefits of all energy investments with an eye toward achieving a final cost assessment in the middle of the third quarter of 2014. EIA is concerned by the projected costs of both major U.S. sources of electricity (i.e. generators and equipment) and their potential impacts on U.S. and international energy security requirements. It has been recommended that the DOE begin to evaluate the utility market and utility sector prospects before applying capital expenditures to develop an economic program for energy and wind and its associated technologies. (5) ————————————————————————— \3\ Exelon, Nuclear Energy, and Exelon Technologies. In addition to the proposed expansion of Exelon’s reactors, in 2009 Exelon began to obtain permission to close an existing or future facility at its former Kia, Nevada facility. (17) Exelon will be seeking approval from the U.S. Nuclear Regulatory Commission to close down a new reactor (called a Vogtle) at the Nevada facility on Sept. 14, 2025. The nuclear reactor at the former facility is currently undergoing a four-phase design test. Although Exelon intends to provide technical assistance to the USN, the company expects to be fully committed to conducting research and technical development with the USN to assess the safety and security of its plant. The following are execlared by Exelon in connection with the development of and funding for an advanced reactor project: 1) Exelon is developing advanced thorium/neon technology for its new nuclear power plant (R&D) at ULV, Nevada 1) Exelon is working with both Exelon and Vogtle on the R&D (or feasibility study for the Vogtle) for an advanced reactor project to be completed from October 2016 to December 2017, 2) Exelon is working to improve the safety and reliability of its new nuclear power plant R&