Infrastructure investors have had their share of pain over the past few years, particularly in developing countries. Aside from worries about the safety and stability of the investment itself,...
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.
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