Despite recently proposing a massive $15 billion merger ofequals between Commonwealth Edison parent Unicom and Peco Energy,Unicom CEO John W. Rowe still has an appetite for growth. Hebelieves the combined company would need to get bigger in certainareas to remain competitive.

“The answer is no; I don’t think we’re large enough. But I thinkit will be much more important to put what we have together firstthen it will be to make the next increment,” he told attendees ofthe 55th annual meeting of the Interstate Natural Gas Associationof America last week in Aventura, FL. “We do not intend to do majoracquisitions until we have, first, gotten approved, second, gotconsummation, and third, made it work.

“But I’m very serious about scale. I went through the break-upof the New England electric business. The first company I ran,Central Maine Power, has now given up its generation and found itswires business sold. The next company I ran was an electric systemthat has done the same. And in most cases they do the right thingfor the right economic reasons. So whereas I once approached thescale issue as a myth, I am increasingly of the view that if youwant to be important and if you want to add value and if you wantto have a chance to make serious value growth in different aspectsof this energy value chain, you have to have scale at levels whichcompanies like most of yours and most electrics didn’t have in thepast,” he told pipeline executives.

“I see the generation and energy marketing business as requiringvery large financial bases. I believe the same thing about theretail business. The delivery business will remain, in my judgment,more checkered. But the issue is what do you want to do besides andaround managing your regulated delivery operations.”

Unicom and Peco combined will serve five million customers andhold about 20,000 MW of generating capacity, with the largestnuclear fleet in the nation, but there is room to grow on themerchant plant side, said Rowe. The company intends to add moregas-fired, combined cycle and peaking capacity in different areasof the county. “That’s a clear part of our business plan.”

It does not, however, want a huge stand-alone commodity tradingoperation. Rather it would like to build an asset-backed tradingarm that provides the ability to maximize the value of its powergeneration.

“The distribution business remains to us a very important sourceof stable income, a source of connections to customers, a source ofcommunity relationships as well as political ones. We believe thereare long-run cost advantages of increasing scale in distributionassets,” said Rowe. “They are not as intense as they are ingeneration and power marketing but neither are they trivial. Theproblem is it’s very hard to pay what it costs to buy someone in apure acquisition….. The merger of equals in the distributionbusiness allows us to get the opportunities of additional scalewithout excessive [costs].”

Size and scale are critical to building an effective retailenergy marketing company, however, which was one of the majorreasons Unicom consented to the proposed merger. “But even with ournew scale we think alliances of one kind or another will beessential,” he said. “If anywhere it is going to be necessary toadd real national scale, it is in trying to create a retailbusiness that does not exist today.

“As I go through the models for the retail energy business ofthe 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 thoughtout is the Enron model. Enron is not going to be the only providerin the marketplace. When we are asked who our competitors will bein the future in the retail energy marketplace, sometimes wemention some of you, sometimes we mention other electrics, but justas often we mention AT&T and Microsoft because no one knowswhat the package of the energy commodity, the hardware and thesoftware are that will create really colorful new retail energyproducts.”

Midwest Power Supply Still Lacking

On an unrelated but equally important matter, Rowe discussed thepower supply situation in the Midwest, which has been inadequateduring peak periods over the last two summers, causing dramaticprice spikes in the wholesale marketplace.

Rowe said in his opinion Illinois and the rest of the Midweststill are short on supply for next summer. “Indeed ComEd is puttingin some new peaking units itself on emergency basis, which we hadnot planned to do…. We just can’t afford to run the risk…..

“In the long run I don’t find this seeming like an unstablemarketplace, but it suggests the economic rewards of good timingwill be very large indeed. The people who had 850 MW of newgeneration on line in Illinois this summer found they had a veryattractive marketplace indeed. On the whole I believe over the nextone to two years the eastern half of the United States tends moreto be short than long. The issue is the number of hours short.”

Rocco Canonica

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