Power prognostications

My New Year’s resolution was to try to be optimistic about 2005—and why not? The past few years have been a roller-coaster ride for the generation industry, with a quick turn here and a negative-G drop there. Although the ride was a bit gut-wrenching the first few times, the ups and downs are now expected and thus easier to take.

Merger mania

Entering 2005, the biggest surprise was Exelon’s proposal to acquire Public Service Enterprise Group (PSEG). If the merger is approved, the new Exelon Electric & Gas will become the country’s biggest generator—with about 52,000 MW of capacity, 20,000 MW of it nuclear.

Announcement of this merger is excellent news for the U.S. nuclear industry because Exelon has proven capable of improving the performance of nuclear plants. Exelon and PSEG already share ownership of the Peach Bottom nuclear station in Pennsylvania and the Salem station in New Jersey. However, in 2003 Salem Unit 2 had a capacity factor of only 84.5%, while PSEG’s 1,110-MW Hope Creek reactor ran at only 79%.

To get an improvement program under way ASAP, a separate agreement proposes having Exelon’s nuclear team take over operation of the PSEG nuclear plants in January 2005. Exelon CEO John Rowe points out that when PECO Energy merged with Unicom, Commonwealth Edison’s nuclear plants in Illinois were running at a 47% capacity factor; they now operate at about 93%—as does Exelon’s existing fleet. Rowe said he aims to bring PSEG’s nuclear plants up to 92% to 94%, and I have no doubt that he will succeed.

Execs are upbeat, too

I’m not the only one full of hope. According to GF Energy’s annual "Electricity Industry Outlook" survey released in January, utility executives are more optimistic than they have been in years. Among the key findings of the survey: 93% believe that during the next three years their companies will grow enough to suit investors; 92% see long-term supply contracts attracting sufficient capital; 90% predict an increase in new coal-fired power plants; and 84% expect to see more assets in rate base. However, the executives surveyed called regulatory certainty their No. 1 issue. Washington, are you listening?

Survey respondents also predicted that during the next one to three years the most successful businesses will be large or midsize regulated integrated utilities, some of which are involved in competitive generation. In fact, generation is considered the "most promising area for growth and profitability" during the next five years. That’s a big change from last year’s prediction that transmission would be the "go-to business" for most new investment in 2004. But legislation to facilitate the development of transmission failed to pass Congress last year, and the renewed interest in generation may only reflect the greater difficulty of siting new transmission lines than new power plants.

Place your bets

"There is strong consensus that there is [a] chase to rate base investment under way for new generation," the Outlook said. In addition, regulators are expected to approve rate increases, and that also could contribute to companies’ financial growth.

In addition to new rate-based generation, company executives cite mergers and acquisitions, commercial and industrial customer sales, and continued cost reduction as short-term drivers of growth. For example, the key driver of the Exelon-PSEG merger was the expectation that $500 million could be squeezed out of their combined operating costs. Two-thirds of the executives surveyed by GF Energy predicted that consolidation would increase—moderately strengthening the industry.

Most surveyed executives also said they expect to put new coal-fired capacity in service within six years. Some of that capacity may feature clean integrated gasification combined-cycle technology, but most will rely on traditional burning of pulverized coal. Some respondents said they believe that the cleaner coal plants will do more than just reduce their own greenhouse gas emissions; they will accelerate the retirement of older, dirtier coal plants.

Eyes on the prize

My analysis of the GF Energy survey results tells me that the utility industry is now more focused on its core capabilities than it has been in perhaps 20 years. In my opinion, this "return to its roots" is a very positive sign. If the past decade is a reliable guide to the future, integrated utilities that focus on excellence in engineering will outperform those that elect to chase unwise investment targets of opportunity.

On the other hand, most prognostications prove wrong because they fail to account for surprises. But there is one inescapable truth about roller-coaster rides: You always return to the starting line and often want to go again. As for 2005, I’m ready for some more thrills—but perhaps not as eager to endure the bumps.