ALLENTOWN, Pa., June 17, 2002 — Following is a letter that John R. Biggar, PPL Corp.’s executive vice president and chief financial officer, sent to financial analysts Monday:
To Members of the Financial Community:
I’m writing recently to provide you with some additional information on recent media reports concerning PPL EnergyPlus’ activities in the Pennsylvania-New Jersey-Maryland Interconnection capacity market.
You may have read that the Pennsylvania Public Utility Commission (PUC) has completed its investigation of PPL’s actions in this market and has issued a report referring the matter to the Department of Justice, the Federal Energy Regulatory Commission and the Pennsylvania Attorney General. The PUC alleges that PPL had “unfairly manipulated wholesale electricity markets in early 2001.”
We’re very disappointed with the PUC report. I want to point out that neither the PUC nor the PJM Market Monitor has claimed that PPL violated any law or regulation. In fact, the Market Monitor said that his comments on PPL EnergyPlus’ market behavior applied criteria broader than the antitrust laws. In any venue in which we will need to respond, PPL will present evidence to prove that we acted ethically and legally, in compliance with all applicable laws and regulations.
As background, companies that sell electricity to end users in the PJM control area are required to have capacity credits to ensure the reliability of electricity service. In November of 2001, the PJM Market Monitor publicly released a report relating to the PJM capacity market in the first quarter of 2001. The report concluded that PPL EnergyPlus violated no PJM rules, but that report did (inaccurately) claim that PPL was able to exercise market power to raise the price of capacity credits.
Later in November 2001, the PUC issued an Investigation Order directing its Law Bureau to conduct an investigation into the Market Monitor’s allegations. Various parties, including PPL, have filed comments and reply comments. Without receiving other evidence or hearing witnesses, the Commission issued its report on June 13 saying, among other things, that it had reason to believe that PPL had unfairly manipulated the wholesale electricity market. It also said that PJM rules did not prohibit PPL’s actions.
As we stated in our comments and reply comments to the PUC in this proceeding, PPL made sound business decisions in a commodity market based on information that was available to all market participants. PPL decided to go into the first quarter of 2001 in a “long” position, while some other companies in the PJM decided to rely on the spot market for capacity. All participants in the market had the same opportunity to buy and sell capacity as did PPL. In this regard, PJM in October 2000 made public to both capacity owners and Load Serving Entities that an increase in capacity obligations would become effective beginning January 1, 2001. There is no allegation that PPL engaged in any deceptive conduct in its trading practices.
Capacity prices increased in the first quarter of 2001 not because of PPL’s actions, but because of the increased PJM capacity requirements that became effective January 1, 2001.
We had neither a monopoly nor a dominant position in the capacity market. And, we had offered longer-term contracts at very moderate prices in late 2000, but a number of companies that apparently needed capacity declined those offers in favor of betting on the spot market. This is not the first time, as you know, when companies who chose to rely on the spot market had an unfavorable outcome and sought help from the regulators.
In case you’d like to better understand how this PJM market works, I’ve attached our description of this market that is excerpted from the comments we filed with the PUC.
PPL continues to believe that its actions were legal and ethical, and we will cooperate with any additional investigations that result from the PUC report. I should also point out that FERC already has rejected a claim by New Power related to PPL’s actions in the PJM market, concluding that the conditions that caused temporary price increases in early 2001 were no longer affecting the PJM capacity market.
I’d like to assure you once again that PPL has long-standing policies to ensure that, across the Company, the actions of our marketing operation are ethical and legal. We take pride in the high standards that we have established for our energy marketing business. As I’m sure you know, we recently assured regulators that our energy marketing subsidiary has not engaged in the type of California trading strategies that have been attributed to Enron. Also, even before regulators asked PPL to do so, we confirmed that we have not engaged in so-called “wash trades,” in which traders buy and sell electricity without profit or loss with the intent of increasing a company’s sales volumes and revenues.
We’ll keep you informed of any further developments in this matter. If you’d like to talk more about this issue, please call Joe Bergstein in our Investor Relations Department at 610/774-5609.
John R. Biggar