In this issue’s profile, we discuss nuclear energy, corporate culture, diversity and one whopper of an upcoming merger with Exelon’s chairman, president and CEO John Rowe.
KD: You helm the largest nuclear fleet in the nation-approximately 20 percent of the U.S. nuclear power. And, with the proposed PSEG merger, you’ll expand that number. Obviously, you’re a big proponent of nuclear energy. What do you see as the biggest positives with the use of nuclear technology?
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JR: Nuclear generation is reliable, safe and cost effective, and according to the National Commission on Energy Policy, accounts for nearly 70 percent of our non-carbon generation supply. Barring technological breakthrough, it will be exceedingly difficult to reduce greenhouse gas emissions unless we preserve and actually expand the current nuclear generating fleet. Nuclear also has the potential to greatly enhance our energy security. Uranium is both abundant and relatively inexpensive in the U.S. We can reduce our dependence on foreign sources of energy, and alleviate pressure on natural gas supplies and prices by preserving and expanding the nuclear option.
KD: In a Jan. 12 Wall Street Journal article, which also quoted you, President Bush is said to have labeled nuclear power a “renewable” energy. Would you agree, and, if so, what would you say to dissidents like Carl Pope of the Sierra Club, who, in that same article, stated, “Most people’s idea of renewable energy is not anything that produces toxic waste.”?
JR: As I said at the time, it’s always gratifying to have the President on your side. We absolutely believe that nuclear energy is a sustainable resource, and we urge the government to work with industry to build and license a new generation of passive reactors. It’s equally important, however, that the government remove the legal and regulatory obstacles to Yucca Mountain. Yucca affords the country a unique opportunity to safely store large quantities of spent fuel until such time as technology and public policy allow it be reprocessed. Unfortunately, until the storage issue is resolved, I think it’s doubtful that any advanced plants will actually be built.
KD: Speaking of renewables, Exelon also has a large number of renewable energy facilities that everyone agrees on: wind and landfill gas, to be exact. How important is renewable energy to Exelon’s fuel diversification portfolio?
JR: Renewables are an important part of our overall generation portfolio. We are the largest marketer of wind east of the Mississippi, we have substantial landfill gas contracts, and we have an active solar program in Chicago. Our commitment stems in part from a conviction that renewables hold promise, and in part from the fact that our state policy makers continue to favor renewables. Pennsylvania recently enacted a new Alternative Energy Portfolio Standard, and Illinois Governor Blagojevich has recently urged the adoption of additional standards. New Jersey, likewise, has a well-developed portfolio standard. But we recognize the very real technical and economic challenges that renewables impose. Wind isn’t dispatchable, landfill gas is limited and solar isn’t yet economical. We must continue to look for the proper balance between the perceived environmental benefit and economic cost of renewable technologies.
KD: Diversity isn’t just important with fuel sources at Exelon. It’s important with people as well. Why does your company concentrate so hard on diversity, even developing relationships with minority and community banks (as an example)?
JR: I have a deep, personal conviction about diversity. Minorities are a large part of Exelon’s customer base, a growing part of our work force and an ever more powerful political force. We serve some of the most ethnically diverse areas in the country. Chicago is a third African American, a third Hispanic. Philadelphia is 45 percent African American, and 10 percent Hispanic. We simply cannot achieve our vision of becoming the best electric and gas company in the country unless we are also the best at providing meaningful opportunities for the people and communities we serve. Logically, that extends to supporting minority owned banks and suppliers located in those communities.
KD: This leads us to a discussion about your company’s culture. After the tsunami in Southeast Asia, Exelon offered matching funds up to $500,000 for employees who gave to the relief effort. What prompted Exelon to do so, and is this a typical example of charity work for Exelon and its employees?
JR: An employee from our Quad Cities plant made the suggestion. At the end of a very good year for Exelon, it seemed most appropriate that we use our good fortune to help alleviate the incredible hardships facing the people of Southeast Asia. Our employees have a strong history of supporting their communities and responding to disaster efforts. They have donated more than $180,000 to tsunami relief efforts so far.
More broadly, Exelon and its affiliates are strong supporters of numerous civic, cultural and community activities throughout our service territories. In 2004, our overall charitable contributions totaled almost $18 million.
KD: As an employee of Exelon yourself, how would you personally characterize the company’s culture?
JR: It’s a culture in transition-moving from a traditional utility culture to a high-performance culture based on continuous improvement. So far, our progress has been uneven. We’ve made a good deal of progress in our nuclear business, and we’re working hard in our energy delivery business. Our goal is to give our employees not just a stake, but a real sense of pride in what we’ve accomplished. To do that, you must do more than pay top wages and provide excellent benefits. You have to listen carefully and show consistent respect.
KD: Exelon’s third quarter 2004 earnings were $568 million, compared to a loss of $102 million in the third quarter of 2003. How did you engineer such a comeback?
JR: Those numbers represent our GAAP earnings, which in the third quarter of 2003 included a number of special after tax charges related to our investments in Boston Generating and Sithe (both of which we have now transitioned out of), and The Exelon Way. If you look at our adjusted (non-GAAP) operating earnings, which exclude these one-time charges, we reported $535 million in Q3 of 2003 and $608 million in Q3 2004. We had a good year in 2003, and a better year in 2004.
KD: Exelon’s revenue growth rate in 2004 was 5.7 percent. That’s pretty good for a power company these days-after all the ups and downs. But, your employee growth rate for the same year is a negative 20.6 percent. What happened there?
JR: Much of the reduction in our work force resulted from the sale of non-core businesses. Additionally, in 2003 we initiated The Exelon Way, a company-wide effort to transform the way we do business. The Exelon Way is an effort to realize the benefits of a common business model and common operating procedures, and to pursue top performance levels in productivity, quality, safety and customer satisfaction. As part of that effort, we also centralized our IT and supply groups, and right-sized our operations in Illinois and Pennsylvania.
KD: The most important item on Exelon’s agenda this year must be the impending merger with PSEG of New Jersey. What was the impetus for this merger, and what does PSEG bring to your table that you didn’t have before?
JR: The merger has the potential to deliver growth for years to come, much as the PECO/Unicom merger has done, which is particularly important in an industry with limited internal growth. It will combine the strengths and assets of both companies. Exelon brings strong financial performance and a top-performing nuclear business. PSEG is first-quartile in its utility operations and has experience in conducting retail market auctions. We believe that the resulting company will be both stronger and more competitive, with greater scope and scale, and greater geographic and market diversity. In the end, we believe that both customers and shareholders will benefit.
KD: You’ll have to jump through a number of hoops to get this merger in place, as I hear FERC is concerned about how much control this will give Exelon in certain markets. What do you anticipate you will need to divest to get this merger finalized, and are you willing to make those sacrifices?
JR: We filed a comprehensive, unprecedented market mitigation proposal with FERC that will, I believe, address their concerns. The filing proposes the divestiture of 5,500 MW. 2,900 MW of that will be fossil, through the outright divestiture of plants. The balance will be nuclear capacity, and we’ll sell that in what we’re calling a “virtual divestiture.” It will be accomplished either via long-term firm base load energy sales contracts, which could include swaps, or in annual auctions of 25 MW blocks of capacity.
KD: Assuming the merger is finalized, what do you anticipate as being the most significant post-merger challenges?
JR: As with any merger, the challenge is to realize the synergies. The merger of Unicom and PECO, which created Exelon, is regarded as one of the most successful mergers in the industry. We’ll build on that success.
KD: This merger will also make Exelon the largest U.S. electric company. As the man in charge, how does that make you feel?
JR: I’m quite proud of what we have already accomplished and humbled by the enormous challenges that lie ahead. This merger is less about size than it is about quality. I truly believe that Exelon Electric and Gas has the potential to set the standard for the industry. Lots of companies claim to be the best. We genuinely have that potential. It is both a tremendous opportunity, and a tremendous responsibility,
KD: Forbes ranked Exelon its #1 utility on the magazine’s 2004 list of “The World’s 2000 Leading Companies.” Why do you think Exelon topped that list?
JR: 2004 was a very good year for us. Our operating and GAAP earnings continued to improve. We increased our dividend by a cumulative 60 percent. We’ve been very good at containing costs. Our nuclear fleet continues to be a top performer. We integrated ComEd into PJM. But we also have our share of challenges, like customer satisfaction and the frequency and duration of outages. I like to think that our management team has earned the respect of Wall Street and our peers in the industry not only for what we’ve accomplished, but also for acknowledging all that remains to be done.
KD: I heard you speak on a panel at the annual EEI conference last year in Orlando, and I remember you saying, “I’m supposed to be an apostle of competition, but there are mornings in the shaving mirror where I’d be more than happy with a contented monopoly.” Are those questionable mornings in the shaving mirror getting more or less frequent these days-given all that’s on Exelon’s plate?
JR: We remain absolutely committed to wholesale competition, which like it or not is forging ahead. And, we remain hopeful that retail competition will emerge over time, although admittedly in more measured steps. In the meantime, we believe that POLR auctions like the BGS auction in New Jersey are very effective at bridging the gap. New Jersey has demonstrated that a well-designed auction can ensure that residential customers get both the benefits of wholesale competition and the reliability and certainty of regulated service. We see an emerging consensus for a similar auction in Illinois.
KD: Is competition the wave of the future for this industry, in your opinion?
JR: Yes, wholesale competition is here to stay. Nationally, wholesale trading levels have increased more than 150 percent, according to Platts. More than 40 percent of the nation’s operating generation capacity is owned by entities other than local utilities. The benefits are becoming increasingly apparent, too. A recent PJM study found that the operating performance of existing generating units has improved steadily as a result of competitive markets. You can also look to the fact that significant new generation has been built, although in retrospect it appears to have been too much of a good thing. And most importantly, we see evidence that these operating improvements and new construction are translating into lower wholesale prices for consumers.
While retail competition is a more vexed and troubled thing, I still believe that the market will strengthen over time, and in any event, to borrow a phrase from a paper that Paul Joskow circulated some years ago, auctions provide an effective mechanism for retail customers to get it cheaper at wholesale.
