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TWST: How have utilities done from a business perspective so far this year, now
that two quarters are behind us?
Mr. Wynne: Wholesale power prices have softened somewhat due to the decline in
the price of natural gas. On the other hand, there has been a continued,
relatively robust growth in demand. And as a result of that growth in demand,
there is a tendency for supply and demand conditions to continue to tighten in
markets such as the Mid-Atlantic market and the other markets of the Northeast.
On the regulatory front, we have seen strenuous opposition at the state level to
a couple of proposed takeovers: those of Public Service Enterprise Group (PEG)
by Exelon (EXC) and Constellation (CEG) by FPL (FPL). But as a general matter,
regulatory developments have been relatively benign for the profitability of
utilities. In particular, we continue to see that the higher wholesale prices of
the last few years continue to be passed through to retail customers. Generator
margins are benefiting from that.
I think that the most interesting business development probably has been the
announcement of major new investments in generation capacity by TXU (TXU), which
announced its intention to build 9,000 megawatts of new coal-fired capacity in
Texas to capitalize on the very wide gross margin available to coal-fired
generators in that market, which is dominated by the much higher cost of gas-
fired generation. NRG (NRG) has also announced a very large proposed capacity
expansion program, which would include not only plants in Texas, but also in the
Mid-Atlantic region. TWST: Coming back to this opposition to these mergers, what is the basis of it?
Mr. Wynne: In the case of Exelon/PSEG, there is a very strong concern on the
part of the New Jersey Board Of Public Utilities that the combined companies
control a significant part of the total available generation capacity in the
eastern PJM, which is a very tight market, and that they may, therefore, be in a
position to manipulate prices. In the case of Constellation, I think the
unfortunate fact was that the merger was coincident in time with the end of
Baltimore Gas & Electric's price freeze, and consequently, it was accompanied by
a huge proposed rate increase for that company, which generated most of the
political opposition.
Tickers included in this excerpt: CEG, EIX, EXC, NRG, PCG, PEG, TXU
For more information call (212) 952 7433. The
Wall Street Transcript does not endorse any of the comments made by interviewees, and does
not make stock recommendations.
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