1. Energy Restructuring in a Time of Financial Crisis Presentation by John Kelly Director of Economics & Research American Public Power Association Washington, DC Center for Research in Regulated Industries Rutgers University 28 st Annual Eastern Conference Skytop Lodge Skytop, Pennsylvania May 15, 2009

2. 2 Exelon Announces 1 st Quarter Results April 23, 2009 First Quarter 2008 2009 % Change Earnings (millions) $581 $712 23 Earning/Share $0.88 $1.08 23

3. 3 Exelon Announces 1 st Quarter Results April 23, 2009 “Our strong first quarter results are keeping 2009 earnings on track to meet our estimates in spite of the difficult economic environment.” (emphasis added) John Rowe, Exelon Chairman & CEO

4. 4 Broader Question  “With continuing analysis of competitive performance of alternative institutional arrangements we will be able to determine more definitely what is the best that we can expect in an imperfect world.” ( Emphasis added) Paul Joskow, The Energy Journal, January 2006

5. 5 Dimensions of Performance? Demand Response/Price Structures Capital Attraction Customer Switching Efficient Investments Environmental Benefits Alleged Shifting of Risk *Consumer Benefits -- Reduced Prices*

6. 6 FERC  “… Under wholesale competition, the efficiency of existing nuclear, coal, and other types of generation has improved significantly, lowering costs to consumers and reducing environmental effects, and the increased capacity factors and availability of these units has further lowered electric generating costs. -- ANOPR, Wholesale Competition in Regions with Organized Wholesale Competition in Regions with Organized Electric Markets,, June 2007

7. 7 PJM Market Monitor Unit on Competitiveness of Energy Markets Recent annual reports stated: “Strong Evidence” that PJM Energy Markets are Competitive

8. 8 Prominent Economists … “There is growing evidence and convincing studies that show that consumers have saved billions of dollars in energy costs as a result of competitive markets.” (Emphasis added) Vernon Smith, Alfred Kahn, Paul Joskow, William Hogan, et al. in “Open Letter to Policymakers," Compete Coalition, Washington, D.C., June 26, 2006

9. 9 Paul Joskow (Energy Journal, January 2006)  “Empirical evidence suggests that well-designed competitive market reforms have led to performance improvements in a number of dimensions and benefited consumers through lower retail prices." (emphasis added.)  “It is evident that real residential prices fell more in states that implemented retail competition programs than in those that did not.”

10. 10 Price Comparisons of States in Joskow Analysis (Residential Customers; Prices in cents/kWh) % Change 1996-2004 199620041996-2004 -3.2% ME12.612.2 -3.2% 4.4% MA11.311.8 4.4% 3.4% RI11.812.2 3.4% -4.1% CT12.111.6 -4.1% -1.0% PA 9.7 9.6 -1.0% -6.7% NJ12.011.2 -6.7% -18.4% IL10.3 8.4 -18.4% -1.2% OH 8.6 8.5 -1.2% 8.0% CA11.312.2 8.0% 3.6% NY14.014.5 3.6%

11. 11 Selected Factors Affecting Residential Price Changes in Retail Choice States (used in Joskow Analysis) (% Change State 1996-2004) Selected Factors ME (- 3.2%)Standard Offer Service (SOS) Staggered Auctions MA ( 4.4%)Rate Reduction, Rate Freeze RI ( 3.4%)SOS, Rate Cap Formula CT (- 4.1%)Rate Cap, Rate Reduction PA (- 1.0%)Rate Cap (generation service) NJ (- 6.7%)Rate Cap IL ( -18.4%)Rate Reduction, Rate Freeze OH ( -1.2%)Rate Reduction, Rate Freeze CA (8.0%)Masks 2000-2001 increases; mitigating effects of large proportion of public power in state NY (3.6%)Rate Reduction, Rate Freeze

12. 12 Price Comparisons of Selected States in Joskow Analysis (Residential Customers; Prices in cents/kWh) % Change % Change % Change 1996-2004 1996200420071996-2004 1996-2007 -3.2% ME12.612.215.2 -3.2%20.6% 4.4% MA11.311.816.3 4.4%44.2% 3.4% RI11.812.214.0 3.4%18.6% -4.1% CT12.111.618.7 -4.1%54.5% -1.0% PA 9.7 9.611.0 -1.0%13.4% -6.7% NJ12.011.214.4 -6.7%20.0% -18.4% IL10.3 8.410.4 -18.4% 1.0% -1.2% OH 8.6 8.5 9.5 -1.2%10.5% 8.0% CA11.312.214.4 8.0%27.4% 3.6% NY14.014.517.1 3.6%22.1%

13. 13 If PJM “Energy Markets are Competitive, Explain … (All Sectors, Prices in cents/kWh) 19962009*Cents Chg % Chg Deregulated DE 6.912.1 5.2 75.4 DC 7.413.8 6.4 86.5 MD 7.013.2 6.2 86.3 NJ 10.514.7 4.2 40.0 Regulated GA 6.4 8.6 2.2 34.4 NC 6.5 8.4 1.9 29.2 SC 5.7 8.3 2.6 45.6 *Twelve month average, Jan. 08-Jan. 09

14. 14

15. 15 Generation Mix of Selected Deregulated and Regulated States, 2006

16. 16 Coal, Nuclear, and Natural Gas Capacity as Percent of Total Capacity: Selected Regulated and Deregulated (PJM) States, 2006  State CoalNuclearNatural Gas GA 44 12 44 NC 51 20 29 SC 33 34 33 PJM* 48 19 34 * Delaware, District of Columbia, Maryland and contiguous states

17. 17 Benefits: Selected Company Profits Summary of Stock Holding Period Returns (%) (1995-2005) 10 yrs. 5 yrs. 3 yrs. 1yr. Regulated 10 9 912 S&P 500 7 51015 Exelon 22 273026 Constellation 13 22 19 11 PSGE 19 13 20 4 PPL 17 18 23 15 Allegheny 7 3 60 49

18. 18 Selected Company Profits (ROE) 2007- 2008 2007 2008 Exelon 29.4 29.3 PSGE 18.3 13.1 PPL 24.1 17.5 Allegheny 19.9 14.7 Constellation 16.5 -30.9 Regulated Utilities 8.1 8.8

19. 19 Concluding Observations -- [DOES NOT SUGGEST] “Empirical evidence [DOES NOT SUGGEST] that well-designed competitive market reforms have led to performance improvements in a number of dimensions and benefited consumers through lower retail prices”

20. 20 Coal Capacity as Percent of Total Capacity: Selected Regulated and Deregulated (PJM) States, 1996 and 2006  State 1996 2006 GA 7344 NC 5051 SC 8333 PJM* 5748 * Delaware, District of Columbia, Maryland and surrounding continuous states

21. 21 Nuclear Capacity as Percent of Total Capacity: Selected Regulated and Deregulated (PJM) States, 1996 and 2006  State 1996 2006 GA 2012 NC 4220 SC 1534 PJM* 3019 * Delaware, District of Columbia, Maryland and surrounding continuous states

22. 22 Natural Gas Capacity as Percent of Total Capacity: Selected Regulated and Deregulated (PJM) States, 1996 and 2006  State 1996 2006 GA 744 NC 829 SC 233 PJM* 1334 * Delaware, District of Columbia, Maryland and surrounding continuous states

23. 23 Puzzling Questions  Why FERC and Prominent Economists Make Broad, Categorical Statements about Consumer Benefits/Price Reductions without Providing Evidence;  Why PJM Market Monitor Ignores Relevant Price Comparisons/Company Profits;  Why a Peer-Reviewed Economic Journal Article Makes Egregious Analytical Error of Ignoring Price Reductions, Freezes, and Caps;  Why are Obvious, Readily Available Facts Ignored?

24. 24 Positive or Normative Analysis?  “… Policy prescriptions in the areas of monopoly, competition, the role of government, and similar areas are more qualitative and valued-based than analytical and fact-based … [consequently] economists do not have to deal with the difficulties of statistical models and “checkable, quantitative forecasts.”  Odd result of “vigorous and confident policy prescriptions” although there is usually a paucity of empirical analysis to support them (Emphasis added).

25. 25 Positive or Normative Analysis?  “…The confidence of economists’ policy recommendations [in areas of government regulatory intervention] is essentially ideological: it rests on their commitment to the competitive market as an ideal, and the consequent belief that any step in the direction of the ideal is desirable.”  Carl Kaysen

26. 26 “Waiting for Schumpeter” in Maryland