Evolution of Electricity Markets April 25, 2008

1. Evolution of Electricity Markets April 25, 2008

2. Exelon Generation: Key Facts • Headquartered in Chester County since 1999. • Over 3,000 highly-skilled employees in PA. • Power Plants in all 5 Southeastern PA counties plus Dauphin, York and Lancaster: 5 nuclear, 1 hydro and 7 fossil units totaling 22% of PA’s capacity. • Pay $150 million annually in PA state/local taxes. • Owns power plants in 5 states and sells electricity in interstate wholesale power markets covering over 20 states, including PJM. • Provides competitive retail services to end-use customers.

3. Traditional “State” Regulated Electric Utilities • Vertically integrated corporate structure • Integrated generation,transmission and distribution function • Regulated monopoly • State utility commissions • State legislatures • Federal Energy Regulatory Commission (sales for resale) • Obligation to serve native load and Obligation on State to give utility an opportunity to earn a fair return on and of “prudent” investment. • Cost-of-service rates • Allowed to recover prudently incurred costs plus a set rate-of-return • Periodic rate case proceedings • Proprietary access to transmission and distribution infrastructure • Perpetuation of the concept of a “natural monopoly” Electric utilities each generally viewed itself as an “island”. Transmission interconnections with neighboring utilities were generally done solely for reliability reasons.

4. Industry Begins to Change • FERC Order No. 888 (4/24/1996) • Open Access Non-Discriminatory Transmission Service (OATT) • Remedy undue discrimination in access to monopoly owned transmission wires • FERC Order No. 889 (4/24/1996) • Establishing rules and governance of Open Access Same-Time Information System (OASIS) • Prescribing Standards of Conduct (SOC) • FERC Order No. 2000 (12/20/1999) • Advance the formation of Regional Transmission Organizations (RTOs) • States with electric rates above national average begin to look for better ways to provide electric service

5. Competitive Electric Utilities • Wholesale competition • Commoditize electricity and generation supply • Prices for wholesale generation are market-based • Maintain regulation over regional bulk transmission system (RTO) • Non-discriminatory transmission access • Regional transmission planning • Open market to any entity that can meet membership and credit requirements • Operate wholesale electricity markets • Bid-based, security-constrained, economic dispatch • Energy and ancillary service co-optimization • Market monitoring • Retail competition • Electricity retailers compete for customers • Open access to incumbents distribution assets • Customers that do not switch receive services from POLR

6. Structure of “Deregulated” Electric Industry

7. Wholesale Market - PJM Overview • Headquartered in Valley Forge - operates world’s largest competitive wholesale electricity market. • Ensures reliability of electric power system in 13 states (Pennsylvania, Delaware, Illinois, Indiana, Kentucky, Maryland, Michigan, New Jersey, North Carolina, Ohio, Tennessee, Virginia, West Virginia) and District of Columbia. • Manages and monitors 24/7 largest centrally dispatched electric grid in the world (over 56,000 miles of transmission lines). • Serves 51 million people and has over 1200 generators competing every hour. • Keeps electricity supply and demand in balance every second to avoid transmission overloads and power disruptions, by telling power producers how much energy should be generated and by adjusting imports and exports of power. • Maximizes economic value to consumers by dispatching lowest cost generation first. • In the long-term, expected price of power calculated by determining what are costs (variable, fixed and ROI) of the last unit required to meet demand.

8. Bid Stack 46 $45 $40 42 $35 38 $30 34 $25 30 $20 $15 26 $10 22 $5 1 3 5 7 9 11 13 15 17 19 21 23 Hour of Day

9. Locational Marginal Pricing (LMP) Creating a “power pool” which uses LMP to set the marginal price of electricity at every node (generation and load) on the system - obliterates the long standing tradition of utilities integrating with their neighbor solely for reliability reasons. The new objective function is minimize overall pool costs while respecting reliability limits.

10. RTO Map

11. Regional Infrastructure Needs

12. Energy Policy Must be Guided by Future Demand U.S. electricity consumption is projected to grow over 43% by 2030. billion kilowatt hours Increased electricity demand requires new resources in an era of increasing fuel prices, escalating construction costs, and more stringent environmental requirements.

13. The Region Tightening Supply and Falling Reserve Margins • To help ensure sufficient generation capacity is available to meet electricity demand on the highest usage days, PJM established target installed reserve margins. • Reserve margins are shrinking fast because of steady load growth and plant retirements. • To maintain reliability with adequate reserve margins, the region will require new generation as early as 2011, and, by 2015, at least 10,000 MW more than is currently under development. Reserve Margins Falling 30% 25% 20% 15% 10% Reserve Margin 5% 0% -5% PJM East -10% -15% -20% 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 As demand increases and plants are retired, new generation must be built.

14. Cost of New Generation Escalating Rapidly • From 2000 to 2007 generation costs increased by 130% . • Driven by higher fuel and labor costs as well as tight supplies for materials. • Construction costs in Northeast about 25% higher than national average due to labor and environmental costs. • Increased global demand competing for limited resources. • Permitting/construction lead times vary from 4 to 8 years in best case scenario. • Carbon regulation will significantly increase costs for fossil generation. • Estimated U.S. must invest $1.5 trillion in electric infrastructure in next 20 years to meet growing demand and carbon regulation. % Change in Commodities (’97-’07 to date) During the generation rate cap period, cost of key generation plant components have risen dramatically. Because of competition for limited resources, increased fuel prices and more stringent environmental legislation, plants will cost hundreds of millions to billions of dollars to build and will require long lead times.

15. Generation Fuel Cost Increases • Since 2000, generation fuel costs have increased dramatically: • Coal – over 180% • Natural Gas – over 200% • Oil – over 300% • Uranium – almost 1000% • For a combined-cycle gas turbine, a $3 swing in gas prices could result in about a $18/MwH increase in cost of on peak power. During the generation rate cap period, fuel costs have increased dramatically. Costs are not expected to decline anytime soon.

16. Revenue from PJM Does Not Support New Build • From 1999-2006, PJM payments to generators have generally been below level required to cover full cost of new generation. • In PJM East alone, since 2000, three generators have declared bankruptcy. • Rising market prices have closed the gap between revenues required for some new baseload generation and current market prices. • Political and regulatory certainty are also among the most critical factors to consider when deciding where to build capital-intensive new power plants.

17. Energy Legislation Debate - State Level • POLR Procurement and Retail Choice • Energy Efficiency and Demand Response (Smart Meters) • Phase In and Ramp Up Rate • Rate Cap Extension Wholesale competition is fairly settled national policy, but after years of frozen retail rates, states are now facing some difficult choices regarding energy policy.