Constellation Energy Corp

3. Regulatory Matters

The following matters below discuss the status of our material regulatory and legislative proceedings.

PJM Performance Bonuses

On December 23, 2022, and continuing through the morning of December 25, 2022, winter storm Elliott blanketed the entirety of PJM’s footprint with record low temperatures and extreme weather conditions. A significant portion of PJM's fossil generation fleet failed to perform as reserves were called. In accordance with PJM's tariff, funds collected from non-performance charges are redistributed as bonuses to generating resources that overperformed during the event, including our nuclear fleet. Complaints were filed at FERC by underperforming generators alleging, among other things, that PJM’s tariff is unjust and unreasonable, and that PJM violated its tariff or otherwise acted negligently in operating the system during that period, seeking to reduce or eliminate any penalty. In 2023, a proposed settlement was filed with FERC, and FERC subsequently approved the settlement as uncontested. We recognized $120 million and $109 million for bonuses (pre-tax), net of non-performance charges, in 2023 and 2022, respectively, associated with this event, primarily driven by the overperformance of our nuclear fleet. Remaining amounts on our balance sheet as of December 31, 2023 associated with this event are not material.

New England Regulatory Matters

Mystic Units 8 and 9 Cost of Service Agreement. On December 20, 2018, FERC issued an order accepting a cost of service agreement for Mystic Units 8 and 9 for the period between June 1, 2022 to May 31, 2024. The agreement is intended to preserve the two units for the two-year period while allowing the Mystic units to recover their costs of operating, including a substantial portion of the costs associated with the adjacent EMT we acquired in October 2018.

In 2020, FERC issued several orders that, together, affirmed the recovery of key elements of Mystic's cost of service compensation, including recovery of costs associated with the operation of EMT. Several parties appealed the orders to the U.S. Court of Appeals for the D.C. Circuit. On August 23, 2022, the court issued its opinion and remanded several issues back to FERC, including the amount of the EMT’s fixed costs that can be recovered via the Mystic COS.

On March 28, 2023, FERC issued an order on remand from the D.C. Circuit’s August 2022 decision (FERC Remand Order). Among other things, the FERC Remand Order affirmed that 91% of EMT’s fixed costs will be

Note 3 — Regulatory Matters

recovered via the Mystic COS, subject to the reinstatement of a margin sharing mechanism on forward sales of vapor.

The Mystic COS requires an annual process whereby we identify and support our projected costs under the agreement and/or true-up previous projections to the actual costs incurred. The first annual process resulted in a filing at FERC on September 15, 2021 and included our projection of capital expenditures to be recovered under the Mystic COS between June 1, 2022 and December 31, 2022. On April 28, 2022, FERC issued an order setting for settlement and/or hearing the issue of whether our projected 2022 capital expenditures can be recovered. A settlement was filed at FERC in March 2023 and was approved by FERC on August 1, 2023. The settlement reduces the recovery we receive for capital projects over the term of the Mystic COS. The settlement also eliminates the potential that we would need to return EMT capital expenditures that were recovered via COS if EMT continues operating after the Mystic COS terminates. The approval of this offer of settlement does not have a material financial statement impact. On September 15, 2022, we made our second annual filing at FERC. On December 5, 2023, FERC issued an order setting for settlement/hearing certain components of the second annual filing, including the issue of Mystic’s recovery of historical rate base costs. We cannot reasonably predict the outcome of the settlement and/or hearing.

See Note 7 — Early Plant Retirements and Note 12 — Asset Impairments for additional information on the impacts of our August 2020 decision to retire Mystic Units 8 and 9 upon expiration of the cost of service agreement.

Federal Regulatory Matters

Inflation Reduction Act of 2022. On August 16, 2022, President Biden signed into law the IRA, which, among other things, includes federal tax credits, certain of which are transferable or fully refundable, for a number of clean energy technologies including existing nuclear plants. The nuclear PTC recognizes the contributions of carbon-free nuclear power by providing a federal tax credit of up to $15/MWh, subject to phase-out, beginning in 2024 and continuing through 2032. The nuclear PTC includes adjustments for inflation. With the nuclear PTC policy support, we expect that many of our nuclear assets will operate through the end of the nuclear PTC period. Further, the IRA includes a 15% book-minimum tax on applicable corporations that we do not expect to have a material impact to our consolidated financial statements. The U.S. Department of Treasury has begun the process of issuing guidance on the relevant tax provisions included in the legislation but has not yet addressed the nuclear PTC.

Operating License Renewals

Conowingo Hydroelectric Project. In 2012, we submitted an application to FERC for a new license for the Conowingo Hydroelectric Project (Conowingo). In connection with our efforts to obtain a water quality certification pursuant to Section 401 of the Clean Water Act (401 Certification) from MDE for Conowingo, we had been working with MDE and other stakeholders to resolve water quality licensing issues, including: (1) water quality, (2) fish habitat, and (3) sediment.

In 2019, we and MDE filed with FERC a Joint Offer of Settlement (Offer of Settlement) that would resolve all outstanding issues relating to the 401 Certification. FERC subsequently issued a new 50-year license for Conowingo, effective March 1, 2021. Several environmental groups appealed FERC’s ruling to the U.S. Court of Appeals for the D.C. Circuit. The court of appeals issued a decision vacating FERC’s decision to grant Conowingo its license renewal and sending the matter back to FERC for further proceedings. Upon issuance of the mandate from the U.S. Court of Appeals for the D.C. Circuit, we began operating under an annual license, which renews automatically, containing the same terms as the license that was in effect prior to the 2021 FERC order.

MDE informed us that as a result of the U.S. Court of Appeals decision, they would be resuming their administrative reconsideration of the 401 Certification. In response to the procedure outlined by the MDE, supplemental briefs on the 401 Certification were filed by the Lower Susquehanna Riverkeeper Association and Waterkeepers Chesapeake (jointly) and us. In addition, we filed a supplemental reply brief. We are unable to further predict the outcome of this proceeding at this time. Depreciation provisions continue to assume operation through 2071 given our expectation that a 50-year license will be issued.

Note 3 — Regulatory Matters

Peach Bottom Units 2 and 3. On March 6, 2020, the NRC approved a second 20-year license renewal for Peach Bottom Units 2 and 3. As a result, Peach Bottom Units 2 and 3 were granted the authority to operate through 2053 and 2054, respectively.

Notwithstanding its 2020 approval, on February 24, 2022, the NRC took action to modify Peach Bottom's subsequently renewed licenses in response to a request for hearing that the NRC had not previously adjudicated. In its February 2022 decision, the NRC reversed itself and concluded that the previous environmental review required by the National Environmental Policy Act (NEPA) for the Peach Bottom subsequently renewed licenses was incomplete because it did not adequately address environmental impacts resulting from renewing the units’ licenses for an additional 20 years. As a result, the NRC has undertaken a rulemaking to modify its regulations and guidance to specifically address environmental impacts during the period of subsequent license renewal. In addition, the NRC modified the expiration dates for the Peach Bottom licenses from 2053 and 2054 to 2033 and 2034, respectively, pending the completion of the updated NEPA analysis. We expect that the license expiration dates will be restored to 2053 and 2054, respectively, once the NRC's reevaluation of environmental impacts resulting from subsequent license renewal is complete. In September 2023, the NRC announced that its schedule to complete the rulemaking has delayed by several months and now intends to be complete by August 2024. This delay does not alter our expectation that the license expiration dates for Peach Bottom will be restored. Depreciation provisions and ARO assumed retirement dates continue to assume Peach Bottom Units 2 and 3 will operate through 2053 and 2054, respectively, given our expectation that the previously approved expiration dates will be restored.