Rowe Still Sees Room to Grow at Unicom-Peco
Despite recently proposing a massive $15 billion merger of
equals between Commonwealth Edison parent Unicom and Peco Energy,
Unicom CEO John W. Rowe still has an appetite for growth. He
believes the combined company would need to get bigger in certain
areas to remain competitive.
"The answer is no; I don't think we're large enough. But I think
it will be much more important to put what we have together first
then it will be to make the next increment," he told attendees of
the 55th annual meeting of the Interstate Natural Gas Association
of America last week in Aventura, FL. "We do not intend to do major
acquisitions until we have, first, gotten approved, second, got
consummation, and third, made it work.
"But I'm very serious about scale. I went through the break-up
of the New England electric business. The first company I ran,
Central Maine Power, has now given up its generation and found its
wires business sold. The next company I ran was an electric system
that has done the same. And in most cases they do the right thing
for the right economic reasons. So whereas I once approached the
scale issue as a myth, I am increasingly of the view that if you
want to be important and if you want to add value and if you want
to have a chance to make serious value growth in different aspects
of this energy value chain, you have to have scale at levels which
companies like most of yours and most electrics didn't have in the
past," he told pipeline executives.
"I see the generation and energy marketing business as requiring
very large financial bases. I believe the same thing about the
retail business. The delivery business will remain, in my judgment,
more checkered. But the issue is what do you want to do besides and
around managing your regulated delivery operations."
Unicom and Peco combined will serve five million customers and
hold about 20,000 MW of generating capacity, with the largest
nuclear fleet in the nation, but there is room to grow on the
merchant plant side, said Rowe. The company intends to add more
gas-fired, combined cycle and peaking capacity in different areas
of the county. "That's a clear part of our business plan."
It does not, however, want a huge stand-alone commodity trading
operation. Rather it would like to build an asset-backed trading
arm that provides the ability to maximize the value of its power
"The distribution business remains to us a very important source
of stable income, a source of connections to customers, a source of
community relationships as well as political ones. We believe there
are long-run cost advantages of increasing scale in distribution
assets," said Rowe. "They are not as intense as they are in
generation and power marketing but neither are they trivial. The
problem is it's very hard to pay what it costs to buy someone in a
pure acquisition..... The merger of equals in the distribution
business allows us to get the opportunities of additional scale
without excessive [costs]."
Size and scale are critical to building an effective retail
energy marketing company, however, which was one of the major
reasons Unicom consented to the proposed merger. "But even with our
new scale we think alliances of one kind or another will be
essential," he said. "If anywhere it is going to be necessary to
add real national scale, it is in trying to create a retail
business that does not exist today.
"As I go through the models for the retail energy business of
the future, I do not find one that is fully convincing and frankly,
the only one that I have seen which seems to me to be well thought
out is the Enron model. Enron is not going to be the only provider
in the marketplace. When we are asked who our competitors will be
in the future in the retail energy marketplace, sometimes we
mention some of you, sometimes we mention other electrics, but just
as often we mention AT&T and Microsoft because no one knows
what the package of the energy commodity, the hardware and the
software are that will create really colorful new retail energy
Midwest Power Supply Still Lacking
On an unrelated but equally important matter, Rowe discussed the
power supply situation in the Midwest, which has been inadequate
during peak periods over the last two summers, causing dramatic
price spikes in the wholesale marketplace.
Rowe said in his opinion Illinois and the rest of the Midwest
still are short on supply for next summer. "Indeed ComEd is putting
in some new peaking units itself on emergency basis, which we had
not planned to do.... We just can't afford to run the risk.....
"In the long run I don't find this seeming like an unstable
marketplace, but it suggests the economic rewards of good timing
will be very large indeed. The people who had 850 MW of new
generation on line in Illinois this summer found they had a very
attractive marketplace indeed. On the whole I believe over the next
one to two years the eastern half of the United States tends more
to be short than long. The issue is the number of hours short."