FOLLOWING MONTHS OF SPECULATION BY INDUSTRY players, Corbin A. McNeill Jr., chairman and CEO of PECO Energy Co., has formally announced that the company will focus on nuclear generation.

The mid-April revelation didn't take many speculators by surprise.

PECO has decided to focus on generation, nuclear generation in particular. While many other companies have chosen to abandon this risky part of the business, PECO is entering it with both feet. The company believes that nuclear is where its strength and expertise lie. The same can be said about McNeill (em nearly every position he's held in his 30-plus-year career has had the word "nuclear" in the title. PECO plans to sniff out bargain-priced generating plants and turn them into moneymaking opportunities. As more companies divest, PECO will have its pick of the plants.

"We're going to maintain our pipes and wires business here in Philadelphia. But we are not actively pursuing right now any other opportunities in that area," McNeill says.

What has sparked some discussion, however, is whether the company is the "unnamed potential bidder" on GPU Inc.'s Oyster Creek and Three Mile Island plants. PECO expressed interest in Oyster Creek as early as last year, according to information from PaineWebber.

McNeill declined to comment, saying "we don't discuss potential merger and acquisition." He did indicate, however, that there are plans to make more purchases in the U.S. in the near-term.

Another issue that has turned heads is PECO's joint venture with nuclear heavyweight British Energy of Edinburgh, Scotland. Under the mantle AmerGen Energy Co., the companies will jointly pursue nuclear opportunities in the U.S. Some wonder how the Nuclear Regulatory Commission and the Securities and Exchange Commission will react to future nuclear acquisitions involving a foreign company.

Public Utilities Fortnightly recently spoke with McNeill to learn more about PECO's plans for competition and his take on nuclear issues.

The Plan

What is PECO's new corporate strategy?

Our strategy is a generation-based strategy. And in the near term, it is the nuclear-focus, generation strategy. And the reason for that is that we believe that we have the people and systems to operate those systems well. And we have demonstrated that over the long-term in the Peach Bottom recovery from 1987 and '88 and in the completion of the construction and the subsequent operation of the Limerick generating station. We have maintained high NRC SALP ratings [Systematic Assessment of Licensee Performance], very good INPO periodic reviews [Institute of Nuclear Power Operations] and at the same time that¼ they've set safety grades for us, we have reduced our outage time, have increased our availability factors and have generally have been among the leaders in the industry in the operation of plants.

Some say that NRC rules could make it difficult for a "nuclear utility" to compete against other power producers? How is PECO going to deal with regulatory issues as a nuclear specialist?

Most of the issues, these "regulatory issues," I view as long-term issues that will get resolved, whether it's spent-fuel disposal or other¼ issues.

What about your venture with British Energy? Isn't that going to prove complicated under current regulations?

The Atomic Energy Act basically states that¼ a foreign entity cannot have control, and I'm not phrasing that exactly right. But we believe that we have developed a governance structure that will demonstrate that the U.S. entity, PECO, will have control of operational and safety matters¼ Now until we test that with the first license applications, we won't know with certainty but we think that we've got very good arguments. Now, I have not participated, I don't even know where the initiative comes from, but I understand that there are some moves in Washington to try to introduce legislation that would even lift that restriction. Right now, no, we are not currently [involved in that process] and maybe if we were asked to get involved by a foreign entity¼ we might. But we have no current intent.

[British Energy] has a team of people over here that has¼ been with us on business development. We have joint business development teams. We have had a number of their people in our training programs. And we are trying to bring a few of their people in for actual work experience in our stations so that when we make an acquisition, we can both send people into the acquired facilities to begin the transfer to our systems of operation over to those newly acquired plants and bring about the efficiencies and the performance we enjoy ourselves.

Is your nuclear strategy limited to your involvement with British Energy?

That's not been decided yet. We have committed to plant acquisitions to be done jointly, if both of us agree.

PECO is one of the lowest emitters of pollutants, such as nitrogen-oxide and carbon-dioxide. This situation could put the company ahead of the competition if greater environmental constraints are placed on utilities. Is this tactic part of a long-term plan?

We believe that as environmental constraints continue to be imposed that nuclear will have an even better advantage. Our overall strategy is to use what we refer to as environmentally friendly generation. We have bid on some of the hydro assets that are for sale and we would be interested in those going forward. I don't know how many more of them will come up, but we will bid on them at the right price that we think offers an appropriate opportunity for shareholders.

Buying Opportunities

Last year, PECO was involved in negotiations to purchase the Maine Yankee plant in Wiscasset, Maine, and Entergy Corp.'s River Bend plant in Louisiana. Both fell through. Why?

We had offered to buy a part of River Bend. In the Maine Yankee case, one of the problems was the time frame for solving regulatory issues. (There were some technical issues with the plant which escape me right now.) That was only one of a number of factors. Our strategy would be to¼ procure only operating facilities, good plants at great prices, because¼ we believe that these assets will in fact be cheaper than fossil assets¼ in the long run.

You have to divide the costs up into two categories: operating and maintenance and fuel expenses and the sunk capital. The operating and maintenance and fuel expenses in the industry are competitive. For instance, we generate, and I think have advertised, in 1996 our operating and maintenance and fuel expenses for the four plants we operate, Peach Bottom and Limerick, were something like 1.53 cents a kilowatt-hour and in 1997, it was somewhat cheaper than that.

Would you consider a plant with high O&M costs because PECO could improve it?

Yes we would. I think that's one of the elements of our strategy. We think that by having a larger-sized company and by having an economy of scale that we could achieve that. I think that it's the reputation we've had that has attracted both Illinois Power and Northeast Utilities to solicit contract support in the recovery of their units. We have some people up at [NU's] Millstone plant and we have some people at [Illinois Power's] Clinton plant. If the opportunity arises, we will consider [more of that type of work]. We're just as interested in acquiring good plants at very attractive prices.

Until recently there hasn't been much talk of sales of nuclear assets. Have utilities been keeping quiet?

I would tell you that I agree with you and that we have had inquiries that have far exceeded those that are public. There is a pretty good interest in the market. I will say that I just got a memorandum offering from Boston Edison within the last hour offering the Pilgrim plant for sale. They apparently went to a number of other utilities also, not just us.

Why this sudden interest by utilities in putting nuclear on the auction block?

First, their strategy is to exit generation, such as GPU, which is selling both its fossil and apparently its nuclear. So that's one form of motivation for sellers. The second one is where nuclear is a relatively small part of their total operation and they don't have a critical enough mass to keep the administrative, or A&G, expenses low. Second, they don't have a big enough mass to keep what I would call motivational career development within their nuclear organization, which is a, in many cases, a more specialized management skill than general utility management.

We're always looking for well-qualified people who will fit into our nuclear [operations]. I think if you look around the industry, we have about four or five people out there now that are former PECO employees who are in fact senior executives in nuclear organizations.

Have you made any administrative changes to carry out your plans?

Dick Smith will on June 1 retire as our president of PECO nuclear and our chief nuclear officer. And it's my intention to nominate Gerry Rainey to replace him. Jerry's been the senior vice president of nuclear operations.

Other Businesses?

What about telecommunications and power marketing?

We started power marketing about three years ago and have one of the bigger businesses in the company in that regard. We are a joint partner with AT&T in the PCS Wireless Business in the Philadelphia metropolitan telecommunications area, which is a pretty large [area]. It goes from Wilmington to Atlantic City to Allentown, and almost to Harrisburg. And then we are partners with a company called Hyperion Telecommunications, which is a subsidiary of Adelphia Cable Company out in Pittsburgh, laying fiber cable. And we have an extensive amount of fiber in both the Philadelphia area but also up in the Allentown area.

We're doing [this through] alliances. We're not involved in that business ourselves, but we bring¼ [other] capabilities. [For instance] we put our antennas in transmission towers in many areas, obviating the need to build a stand-alone telecommunications tower, which, in this area tends to draw a lot of complaints from citizens. Plus we, particularly, in urban areas, we have a lot of underground wire capability and we can put our fiber-optic cable in those conduits.

Competitive Position

PECO's retail electricity rates are about 30 percent above state average; 42 percent above national. How is the company going to compete?

We are under a public utility commission rate order [that] will go into effect next January 1 in which roughly two-thirds of our customers [will have choice] early in the year. And then early in the year 2000, the other third of our customers will be able to choose their energy supplier. So¼ all of our electricity sales, the energy sales themselves, will be done at competitive prices.

Elizabeth Striano is managing editor of the Fortnightly.

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