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Risk Management Forum: Desperately Seeking Liquidity

Troubled markets drive defensive tactics.

Fortnightly Magazine - February 2009

which is our low-cost nuclear generation portfolio. There’s a lot of value to that. It’s derived from fundamentals in the industry and commodity prices for gas or coal, whatever’s on the margin. Focusing on protecting that value, and ensuring reliability in T&D, allows us to provide certainty in earnings.

That’s not to say there isn’t a new credit environment, and a changing economic environment. It’s very volatile and in some measure distressed.

We continue to evaluate the value of what we have and how to assure certainty around that value. We manage commodity prices, the value of the fleet, and obviously electricity fundamentals, which are changing. If you talk to any CRO or leader of a marketing entity or utility executive, they’d give you a different scenario of risk from two years ago or even seven months ago when natural gas prices were above $10 in forward curves. You get new information and change the future outlook.

We’re the lowest-cost generator in the stack, so it runs first. If we run it well and keep it on line, which we do well, it will provide value in many scenarios. It’s not the same concept for natural gas and some coal plants, and clearly peaking or older steam generation plants.

We’re looking at an environment where liquidity isn’t the same as it was. Fewer entities in the market are trading commodity products as aggressively as they were. The further out you look in time, the more clearly visible that becomes.

We’ve gone through these cycles. We’ve seen trading entities trying to add value as intermediary or some other kind of marketers. We’ve gone through these cycles before and the market model for electricity is alive and well.


Fortnightly: How has the Wall Street meltdown affected market liquidity, counterparty credit risks, and access to risk-management services from financial firms?

Cornew: Liquidity isn’t like it was nine or 12 months ago, but we can still actively participate in the business. Counterparty entities still are out there and are willing to engage. It’s somewhat like what we saw post Enron, but I think not even quite that drastic.

We’re clearly seeing some pullback from [financial company counterparties]. We’re seeing entities that are either not there, or are there at a different level, or are getting in or out of certain elements of our business. Certainly some financial entities have had their issues, and commodity trading gets downsized in their platform. Other entities are entering, especially foreign banks. We’re definitely seeing the players are changing.

Our credit requirements always have been very stringent, and they considered the tail risks. We’ve managed our credit exposure well, and it’s well diversified on a counterparty basis. With some entities we’re seeing that as their credit outlook changes we have to modify and change with it. But it’s not a big impediment for us at this point. In this market Exelon is a sought-after counterparty. Other folks are looking to us.


Fortnightly: How do you anticipate the economic downturn will affect demand for energy commodities? How is this affecting