Potomac Electric Power Co.’s (Pepco) strategy of getting out ofpower generation, focusing on its wires and distribution businessesand emphasizing its non-regulated side is in full swing, says theutility’s top executive.

Two years ago the Washington D.C.-based utility decided its”pockets weren’t big enough” to grow its generation business so itopted to sell the majority of its facilities, said John M DerrickJr., chairman, president and CEO. After its aborted merger withBaltimore Gas & Electric, Pepco “went to work” on ageneration-divestiture plan to avoid huge stranded costs for itscustomers, he noted. It “cleared the decks of all that overhang.”

Currently, Pepco is negotiating with six or eight “seriousplayers” to sell or transfer nearly all of its generation capacity- about 6,055 MW. Not up for sale, however, are Pepco’s facilitiesat its Buzzard Point and Benning generation stations in D.C., whichhave a combined capacity of 800 MW.

Derrick said Pepco hopes to sell its generation capacity for an”upside price” of about $500 per MW, or for a total of about $3million. It expects to complete the sale or transfer of thegeneration assets by the end of 2000, at which point it willprobably use the proceeds to pay down debt and invest in its retailmerchant business, he noted.

The divestiture of its generation assets is part of theutility’s preparations to compete in a restructured retail powermarket, which is scheduled to kick off Jan. 1, 2001 in Washingtonand be fully completed by 2003.

Pepco’s purchase of Gas Atlantic, which has been re-named PepcoGas, catapulted the company into the gas business last year for thefirst time, Derrick told reporters at a press briefing held at theUnited States Energy Association’s (USEA) headquarters in theDistrict of Columbia last Tuesday. “We were in nothing butelectricity until we started down this path,” he told NGI. PepcoGas acts as a consultant and agent for gas customers (mostlycommercial and industrial), according to Derrick.

With the acquisition of Gas Atlantic, the contribution ofPepco’s non-regulated electricity and gas assets to annualrevenues shot up to $105 million in 1999 from $13 million for theprevious year, he said. Still, revenues from Pepco’s non-regulatedenergy operations accounted for only a small portion of theutility’s overall revenues of $2.5 billion last year. But Derrickpredicted this will start to change “dramatically.” In the future,Pepco wants to be known as an energy company rather than just anelectricity provider, he said.

Gas Atlantic is a subsidiary of Pepco Energy Services, whichmarkets electricity and gas to residential customers inPennsylvania and gas in Maryland and D.C., as well as providesenergy management services. Pepco, whose market has been confinedmostly to D.C. over the years, is expanding its reach into markets”north of us” and into northern Virginia, Derrick said.

“If we had our druthers,” Pepco over the next three to fouryears would like to own only transmission and distribution assets,with its regulated businesses dropping to “three-sevenths” of wherethey are now. It also wants to be a full-scale retail merchant,selling as a bundled energy service major appliance warranties anda range of telecom services (cable television, high-speed Internetaccess, and local and long-distance telephone service), accordingto Derrick. Pepco has partnered with RCN Corp. of Princeton, NJ, totake its first dip into the telecom market. The two companies havecreated a 50-50 joint venture, Starpower Communications Inc.

The fact that Pepco is located within the PJM group and is not aholding company has enabled it to “move aggressively on our retailstrategy,” he said. The PJM is the “best RTO in the United States,”Derrick boasted, although like other utilities he’s worried aboutthe reliability of the transmission grid. The “American peopletrust this industry for its reliability,” but the Department ofEnergy, FERC and the North American Electric Reliability Council(NERC) all concede there’s a problem, he said. NERC must “have theauthority to enforce these [reliability] rules.”

Derrick views the D.C. utility as a “niche player” now, quicklyadding that big energy players gobble up “niche players” likePepco. “Clearly over the longer haul [Pepco] is not going to staythis size,” he noted. But he said “no comment” when asked pointblank whether Pepco currently was in negotiations with a potentialpartner or partners.

Derrick hopes Pepco’s new strategy will help to change the wayWall Street has viewed utilities over the past couple of years.”The whole industry at this point is somewhat out of favor withWall Street,” he said, noting the industry overall has been laggingfar behind the S&P 500 for several years.

Even investors in the big mutual funds, which traditionally havebeen the utility industry’s bread and butter, have moved money outof utility stocks and into high-technology stocks, Derrick noted.But the “skyrocket[ing] growth” of the high-tech stocks now appearsto be slowing, he noted, opening the door once again for utilities.

In the past, Wall Street has tended to view the utilities as allthe same. But the industry “[is] not going to be nearly asmonolithic as we have been in the past,” Derrick noted. Ratherutilities, like Pepco, will have their own brand of uniqueness.

Susan Parker

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