A Power Producer’s Perspective

on Dodd-Frank (Hedging Physical Pow

September 2, 2010

New Pictures
Agenda 

• Company overview• Power markets, energy prices and cash 

flow/earnings risk

• Hedging
The Exelon Companies

3

Exelon PowerManages, operates and maintains the company‘s fossil generation assets. 

Exelon NuclearOperates the largest fleet in the United States and third largest in the world.

Exelon EnergyRetail marketer of electricity and natural gas 

Exelon Power TeamDevelops and implements long-term sales and supply strategy and is responsible for the physical delivery of power to wholesale customers and the optimization of portfolio assets.

Purchases, transmits and delivers electricity to customers in Northern Illinois. 
Multi-Regional, Asset-Based Company

Midwest CapacityOwned: 11,412 MWContracted: 2,900 MW Total: 14,312 MW

ERCOT/South CapacityOwned: 2,222 MWContracted: 2,917 MWTotal: 5,139 MW

Total CapacityOwned: 24,850 MWContracted: 6,153 MWTotal: 31,003 MW

Electricity Customers: 1.6Gas Customers: 0.5

Electricity Customers: 3.8M

Generating PNuclearHydroCoal/Oil/Gas IntermediatePeaker

Mid-AtlantOwned: ContractedTotal: 

NeOwCoTo
Exelon’s Core Business...

• Is ...

• Owning and operating a fleet of generating units and 

selling the electricity to wholesale customers in spot aforward markets (Exelon Generation)

• Owning and maintaining electric transmission facilities 

deliver bulk power to local distribution systems (ComEand PECO)

• Owning and operating electric distribution systems tha

deliver electricity to over five million retail customers (ComEd and PECO)

• Hedging the price risk associated with its generation 

portfolio (Exelon Generation – Power Team)

• And is not ...

• Engaging in financial or derivatives trading or dealing 
Organized Power Markets - Price Volatility

• These physical markets yield the volatile spot prices that Exelon 

hedges using different types of transactions

• Examples are PJM, MISO, ISO-NE, and ERCOT

• Primary mission is to match supply (generation) and demand (lo

based on market offers for supply

• Determine spot market prices at generator nodes (pay generators

load buses (charge loads a zonal price based on aggregation of lobus prices)

• Create and publish prices for combinations of nodes called “hubs” 

facilitate power markets

• Spot market prices are a function of the spot fuel price for the ty

fuel used by the marginal generating unit needed to match dema

• Fuel on the margin is usually coal or natural gas• Demand is largely a function of the weather
Forward Power Prices and Cash Flow Vola

If left unhedged, cash flows are subject to 

substantial fluctuations due to changes in power prices

$ 80 / MWh$ 60 / MWh$ 40 / MWh

2012 Power Price on 

On Jan 1 2012

2012 Power Price on 

On Jan 1 2009

$ 60 / Megawatt-hour 

(MWh)

Forward Power Prices 

Decline in expected revenu-Cash shortfall -Cannot fully meet operating payments-Unable to pay dividends and infrastructure.-Increased credit risk and asrequirements

Increase in expected revenu-Cash surplus -Meet operating expenses and - Pay dividends and invest in 

No change in expected rev

- Cash to meet operational e

payments, dividends etc. 

Revenue Implica

Forward Power Price 

Forward prices can fluctuate 
Exelon’s Hedging Program

• Exelon hedges price volatility that exists in the markets in w

of Exelon’s generating units are located

• Objectives

• Maintain desired credit rating• Ensure cash flow certainty to enable capital expenditures and co• Maintain shareholder value return policy

• Longer term hedging – portfolio management (mitigate forw

market price risk)

• Transactions that typically start six months to three years after th

and have terms of a year or longer

• Shorter term hedging – portfolio optimization (adjust hedgin

changes in unit availability and the weather)

• Transactions that start from as soon as the next hour and have t

from the next hour up to six months 
Types of Hedging Transactions

• Physical transactions

• Standard megawatt blocks of energy• Products to match load (electricity demand) of customer• Sales to distribution utilities like PECO, ComEd, PPL, Allegheny, 

auctions/RFPs, to serve customers not receiving service from cosuppliers

• Financial transactions

• Standard over-the-counter (OTC) swaps: agreements to exchang

price stream (e.g., PJM spot market price x MW amount) for fixed (agreed fixed price x same MW amount)

• Exchanged-traded swaps• Standard put options: seller provides to buyer the right, but not th

to sell at a fixed price (meaning in effect the right to exchange a fstream for a fixed price stream )

• Fixed strike price is part of agreement, premium paid for the option

• Proxy hedges of forward power prices using commodities the pric

are closely correlated with forward power prices (e.g., buy natura
Importance of OTC Swaps

• Exelon produces power, and seeks to hed

markets where liquidity exists

• Market for physical hedges in out years ca

relatively thin

• Market for financially-settled hedges in ou

is typically more liquid

• A substantial percentage of Exelon’s long

hedges are OTC swaps
Example - OTC Swap To Hedge Long-Term Pric

• Assume 100 MW of expected generation in PJM in Calendar Ye• Assume further that a market exists for OTC swaps for 2013 and 

price today to buy a swap for the entire year is $60/MWh

• Revenue possibilities without hedge, and assuming an average 

2013 could be $40, $60, or $80 per MWh:

Revenues = 100 x PJM Western HUB Price ($/MWh) x 8760

Expected 

Generation 

(MW)

Variable 

Market Price

Hours per 

year

PJM WHUB Price ($/MWh) 40 60 80

Revenues $35M $52.5M $70M
OTC Swap Example (cont’d) 

Revenues assuming entry into OTC swap for $6

Revenues (fixed for float swap) = 100 x $60 x 8760 – 100 x PJM WHUB Revenues (net : generation and swap) : 100 x $60 x 8760 = $52.5 M 

PJM WHUB Price ($/MWh) 40 60 80

Revenues $52.5M $52.5M $52.5M

Seller still paid by PJM 

generating, but effectiv

transfers that revenue to 

counterparty in exchang

fixed price revenue stre
Unit Failure Example – Shorter Term Hedgin

• Unexpected loss of supply (generation unit failures) : 

• An outage or partial outage of a unit, such as an unexpected boiler leak at a coal p

unit to be out of service for days, weeks or even months 

• Implications : 

• As most of the generation has been sold forward/hedged via swaps, a unit failure c

producer to be short power (oversold) because the generation is no longer availablsales become unnecessary as hedges, and themselves create market risk, becausis no longer being paid the floating price stream it is transferring to its swap counte

• Required hedging action : 

• Enter into an opposite fixed-for-floating swap (pay a fixed price in return for the floa

physical power at a fixed price to bring position back into balance

Net Position : Generation and Obligation

Market Risk 

Reduced / 

Eliminated

Market Risk 

Resurfaced

0

Example reflects loss of 

expected generation due to 

unit outage. The way to hed

this would be to enter a fixe

effectively buying back the lo

the market for a known
Weather Risk Example – Very Short Term He

• Weather Risk (impact on quantity of sales obligation): 

• Weather is one of the primary factors influencing electricity demand - and it is hard to p

• Implications: 

• If expected temperatures increase in the short-run (typically anywhere from the next ho

days out), expected need for generation increases (and vice versa). 

• Required Hedging Action: 

• In the situation where a revised weather forecast and corresponding load obligation ex

expected load obligation (more demand than expected), a power producer may choose power at a fixed price, or enter into a swap where it pays the fixed price and receives th

both of which would reduce price exposure from being short the power. 

As a result of increased de

1,000 MW caused by une

weather, producer would on

exposed to market prices

hedge against this would b

new fixed for float swap, e

buying the previously una

1,000 MW at a known, fix

Net Position : Generation and Obligation

Market Risk 

Reduced / 

Eliminated

Market Risk 

Resurfaced

0
Hedging and Systemic Risk 

Hedging by power generators, or by others with tangible assets wit

inherent economic value, does not contribute to systemic risk 
Conclusion

• A physical generator is in the business of producing a

power

• A physical generation business must hedge its risk• Efficient hedging requires transactions in both physic

financially-settled products

• OTC swaps are key tool for hedging • Although a swap customer, a physical power generat

"dealer" or otherwise in the "swap business”

• A physical generator that uses financial transactions 

its hedging program will not thereby create systemic r