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The Man Who Would Be King

Exelon Chairman, President, and CEO John W. Rowe, on the proposed merger that would create the largest utility in the United States.

Fortnightly Magazine - May 2005

I say, "beware," based on my New England experience. You may not get rate base; you may get integrated resource management, and that was a process that drove the cost up rather than down. I think we are dealing with a bunch of models, all of which have some history of failure, and the issue is how you make them work.

Fortnightly: Why do you think you failed in your acquisition of Illinois Power? What did you learn from the experience? What is different this time around?

J.W.R: We learned several things. First thing we learned is that there was not a clear consensus in Illinois that it was good for Illinois that we get bigger in the state. One of the issues is, do people want you to be a very large hometown company, or do they want more competition? At the time, there was at least some preponderance of a view that they wanted to increase the emphasis on competition even beyond that inherent in the statutory structure. We weren't really turned down at Illinois Power-we were turned down on the fundamental proposal that we have a four-year continuing rate agreement with an all-requirements supply between Com Ed and Exelon generation. The alternative to that-which most of the parties before the Illinois Commission have worked out over the last year-is to adapt the New Jersey [retail supply auction] as a way to make certain that a competitive wholesale price is available to the retail consumer who doesn't shop. To some extent PSEG is a bigger, better deal for us. It's clear that it can stand on its own economics a little more easily. But to some extent the PSEG transaction is a response to the fact that in turning down our proposal on Illinois Power, the Illinois legislature was pushing an increasingly competitive framework.

Fortnightly: There has been much discussion and concern in the investment community over a possible "earnings cliff"-the possibility that Exelon will earn less in a post-2006 Illinois rate environment. Were your proposed Illinois Power and PSEG acquisitions part of a solution to that issue?

J.W.R: The "earnings cliff" issue has been fundamentally answered by rising wholesale prices for power. The Illinois Power transaction was intended as a way to give both the company's shareholders and its consumers a sense of stability and certainty; to reassure shareholders that there wasn't a big cliff issue, on the one hand, to reassure consumers that they didn't have open-ended exposure to wholesale price volatility on the other hand. But the issue now is not, how do we avoid a cliff? The issue is, how do we manage what may be looked at by some as too much good news in the wholesale markets so that we provide a reasonably stable price to our customers?

The market price for power has come up substantially in the last 18 months. I think the issue now is how we make certain on the one hand that we get a fair market price for Exelon generation's power and also for the power that Com