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Risk Management Forum: Desperately Seeking Liquidity

Troubled markets drive defensive tactics.

Fortnightly Magazine - February 2009

your hedging activity and supply plans?

Cornew: There’s obviously an impact on demand in the near term, but in the long term we see demand behaving somewhat consistently.

In the short run we’re seeing lower demand than expected, meaning it’s not growing like we expected it to. We’re seeing some reduction in demand in the industrial and small commercial sectors, and the residential sector isn’t growing as you’d expect. There are many outlooks for demand, depending on how long you expect the recession to last. Some say it will be flat for two to three years, and others say a little shorter or a little longer.

We’re concerned about demand not just for electricity, but also natural gas, because natural gas sets marginal prices for power in many of the regions we serve. With demand for natural gas, you also have to think about the supply side. Six or seven months ago, when we were seeing demand increasing and when gas prices were high enough to attract LNG [liquefied natural gas] into the United States, there was a lot of discussion about building more power plants. We’ve been looking at building more power plants in the eastern United States and potentially in Texas. We’re seeing a substantial slowdown in that kind of activity. I’m sure the credit crunch and the economy’s impact on demand are making many entities take a hard look at whether and when they will invest in new generating capacity. The same thing is true on the natural-gas supply side. We saw supply responding very significantly to high prices, with more drilling in shale areas of the United States. With a drop off in demand for natural gas, you’ll also see supply responses.

What does it mean for our resource plan? We own PECO and Commonwealth Edison, and they have resource needs going forward. Whether they require new generation is only a question of time. In an economic downturn, you’re probably pushing out the time when you are building new resources, but you still need the existing resources.

As a low-cost nuclear generator, we can compete readily in that environment. I’ve seen natural gas prices at $2 and $3 dollars, and now it’s at $7. For a nuclear operator there’s a lot of opportunity in that environment.

 

Fortnightly: How does Exelon’s proposed acquisition of NRG Energy fit into your financial risk-management strategy?

Cornew: We believe there’s value in operating synergies, in combining generation assets and in diversifying your generation assets. We believe we can add value to the NRG assets with our [risk-management] discipline and marketing capability. We’ve always been interested in growth, and growing our generation fleet in a smart and risk-managed way.

Exelon’s balance sheet, and what it means in a capital-constrained environment, is very powerful, in terms of what it means for building infrastructure and acquiring assets that are viable and will help our business grow and work in the future. That’s the model we bring to the market, and we’re bringing that value to NRG.

 

Fortnightly: What do you see as the most