Exelon Chairman, President, and CEO John W. Rowe, on the proposed merger that would create the largest utility in the United States....
New realities demand new direction from utilities.
To paraphrase Shakespeare, "The true soul of joy is in the process." For the utility industry, nothing could be further from the truth. The deregulatory "process" has not been joyful. It has been painful and costly. Perhaps equally disturbing, the process has compromised the reliability of the utility industry and has placed in question the judgment of its leadership, all of which is particularly troubling for an industry where "reliability" and "trusted leadership" have been widely regarded as the industry's hallmark characteristics.
Although operating reserve margins were once an indicator of reliability, undercapitalized entrepreneurs now frequently own generating capacity. The industry's transmission system, which has always been an invisible, dependable network of arteries for reliable supply, now experiences blockages and hemorrhages symptomatic of bigger problems facing us tomorrow. Where stable dividends were reflections of trusted leadership, bankruptcy and restructuring concerns now overshadow the public confidence. The failures have been well documented: California, recent blackouts, Enron, PG&E, AES, Mirant, and LG&E Trading. The list goes on and on.
These changes prompt one to wonder what happened to our leadership. We cannot minimize the incredible structural changes that have occurred in the utility field since 1992. The traditional vertically integrated structure of 1992 was dismantled in large measure by regulatory design. But the reformatting of the industry also was accelerated and thrown off course as entrepreneurs of every form descended with visions of fast money. They came with trading schemes for marketing and sales schemes for aggregating customers. They also came with leveraged financing schemes for locating generating assets almost anywhere a pipeline and a transmission line intersected.
The leadership also participated in what had to appear as a random shuffling of industry business segments as mergers took place, unregulated subsidiaries sprouted, and utility holding companies came back into vogue. Did they join in a popular trend? They did. The truth is they had little choice. Their traditional industry and customer base were being cannibalized and, rightly or wrongly, participation in the trend was a form of self-defense.
The failure of the merchant generation business in 2001 was merely the latest in a series of failed business strategies by the industry since 1993. As shown in Figure 1, by 1992, most utilities were integrated utility systems. Earnings were stable and reliable. With wholesale power deregulation followed by retail choice, many utilities were forced to divest assets in many states and develop new business paradigms. Between 1993 and 2001, utilities tried a number of growth strategies, ranging from: (a) consolidation, through mergers and acquisitions; (b) diversification into cable, telecommunications, water, merchant power, and engineering services; (c) regional trading; and (d) divestiture and reaggregation.
The few success stories during this period centered on claims of avoiding major mistakes and not in celebrating returns of a scaleable and sustainable business model.
Sustaining valuation during this period, in and of itself, was a major task. Figure 2 offers a selective but instructive snapshot of a troubled period where volatile earnings and stock valuations prevailed. Yet, during this period, some