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Rowe Still Sees Room to Grow at Unicom-Peco

October 11, 1999
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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 generation.

"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 products."

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."

Rocco Canonica

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