Dear Mr. Crane:
According to Exelon’s power struggle, your company is searching for a strategy that will restore the glowing prospects that it faced in the period from 2004-2008. That is the period that an Exelon leader called “the boom years for nuclear.”
During that time, Exelon’s stock price reached an all time high of $91.64 and the cash was rolling in as your low marginal cost nuclear plants sold their electricity output into a wholesale market where the selling price for all suppliers was determined by the prices charged by the last generating unit needed to meet projected demand.
As shown in the above graph, natural gas prices charged to electricity producers vary wildly. When natural gas prices were as high as $12.00 per MMBTU the last-in generator needed prices on the order of $120 per megawatt-hour just to pay for the cost of fuel, the wear on the plant, and the minimal cost of operators associated with a natural gas fired power plant.
Your predecessor, Mr. John Rowe, thought he was very smart to be proud owner of a fleet of 17 large nuclear plants that had an average production cost of $20 or less per megawatt-hour selling into such a market. He bragged to investors about his coup.
We have the largest low-cost, low-emission nuclear fleet in the nation, and all 17 of those units operate in competitive markets,” he said. “As gas, coal and capacity prices increase and reserve margins decline, the value of our nuclear fleet increases. We expect that value to increase even further in a carbon-constrained world.
(Note: Above comment slightly edited because the original source seemed to have a typo.)
In other words, Mr. Rowe had created a situation in which Exelon was a nearly pure play on merchant electricity generation under the assumption that a fuel source with a volatile, cycling history would continue rising in a linear fashion. His primary hedge was to hold onto Commonwealth Edison’s regulated distribution business.
Mr. Rowe was taking credit for a major effort of operational improvement led by Oliver Kingsley. That multi-year effort turned Commonwealth Edison’s high cost, unreliable, individual nuclear units into a fleet of exceptionally maintained and operated nuclear plants with one of the highest average capacity factors in the world. You played a major supporting role in that effort.
Rowe was also taking credit for the well-operated units that were added to Exelon’s stable of large nukes through the purchase of PECO, which was headed by one of the best CEO’s the nuclear industry has ever seen, Corbin McNeill.
Exelon’s decision to marry a merchant plant operation with a regulated distribution utility was a choice made by a guy who had grown up in the regulated electricity business as an accountant. He though in straight lines and did not recognize volatility or understand how to operate in a cyclic commodity business. Rowe apparently remembered, however, that one of the keys to increasing profits in a regulated business was to spend a lot of time lobbying the government to establish rules that stacked the deck in the business’s favor.
When Peco and Commonwealth Edison merged, there was a struggle over vision and leadership during a period when there were two CEO’s, Rowe and McNeill. McNeill had an expansionary view of the electricity market, wanted to use the cash flow from the profitable merchant plants to buy even more generating units and believed that nuclear energy had a bright future. He recognized that one of the company’s core competency was its operational excellence and understanding of the principles of operating reliable nuclear plants.
One of the ways he wanted to take advantage of that asset was to diversify Exelon from being just a plant owner/operator into fourth generation nuclear plant design and development. By providing both cash and a strong input from experienced operators and maintainers, he believed that Exelon could become a major player in the business of building new nuclear power plants.
McNeill had a vision and wanted to lead a company that was adding large quantities of clean power to the world’s electricity grids. Rowe’s goal was more focused on short-term gratification. He wanted to lead a company that controlled the largest share of existing nuclear plants in a constrained, high priced market. Here are some of the articles I wrote about McNeill and his vision.
- (November 6, 2000) A Vision for Nuclear Power
- (January 9, 2001) Dear Mr. President, Send in the Nukes
- (February 13, 2001) Exelon goes first with PBMR
As you search for a winning strategy please think more about building than acquiring. Invest some of your profits into marketing your highly-valued product and stop passively complaining that the electricity market is shrinking. Help productive, energy-intensive businesses in your market areas expand and grow their electricity use. Work to capture markets like home heating, water heaters, and appliances back from the natural gas industry. Support efforts to electrify more trains in the dense population areas that you serve.
Encourage Elon Musk and other electric car entrepreneurs.
Invest cash and experience in one or more of the exciting new nuclear plant development projects where there are people full of ideas that could use some of your operational knowledge, planning skills, regulatory expertise and political clout to get past the investment “valley of death” and into actual production.
Stop depending on a strategy that drives up wholesale energy prices and chokes off the growth that your company and the rest of the United States needs in order to finally recover from the Great Recession. Recognize that high energy prices were a major part of the cause of that recession; many people defaulted on their new home mortgages when their commuting and utility bills increased enough to to make it difficult to keep up with the payments.
The business of generating electricity should be a great one to be in. The product is almost infinitely useful; essentially all of your customers are repeat purchasers that buy more unconsciously by flipping a switch, pushing an “on” button or turning a thermostat. When the generating source produces a tiny volume of waste, no air pollution, no CO2 and does not depend on continued supplies from unstable places, you have a real winner that should be effectively marketed.
PS – I am an Exelon stockholder. I like cyclic businesses that offer occasional opportunities to purchase a lot of value “on sale.”