by Peter Behr
April 29, 2011
There are no new nuclear plants in the foreseeable future for
Corp., the largest U.S. reactor operator.
Old plants, though, are a
Exelon's proposed acquisition of Baltimore-based
Energy, announced yesterday, would add five nuclear reactors at
three plants to the 17 reactors at 10 plants that the Chicago-based
company already runs.
Exelon's total nuclear capacity would climb
from 17,047 megawatts to nearly 19,000 if the projected $7.9 billion
deal is completed.
"They can buy them much more cheaply than they can build them," said
Ellen Vancko, nuclear project manager for the Union of Concerned
Although the disastrous
accident at Japan's Fukushima Daiichi
nuclear complex may lead to new regulations and higher costs for
owners of existing U.S. reactors, that risk did not sidetrack merger
negotiations between Exelon and Constellation, which began months
before the March 11 earthquake and tsunami.
The reason, industry representatives and critics agree, is that the
existing plants remain very profitable, even with the decline in
electricity prices that followed the market crash and recession in
The Nuclear Energy Institute, the industry's main trade
organization, ranks current nuclear plants as the cheapest source of
U.S. electricity, with operating, maintenance and fuel costs of just
over 2 cents per kilowatt-hour in 2009, compared to 5 cents for
electricity from natural gas-fired plants and 3 cents for coal
Exelon said its generating plants returned average
margins of 3.76 cents per kilowatt-hour last year, despite lower
power prices, and two-thirds of Exelon's overall generation capacity
comes from nuclear plants.
"These [nuclear] plants, which are fully depreciated, were purchased
at a discount and are, in fact, cash cows," said industry critic
Mark Cooper, a senior fellow at Vermont Law School's Institute for
Energy and the Environment.
Christine Tezak, an energy analyst with Robert W. Baird & Co. Inc.,
said that Exelon has been regarded by the Nuclear Regulatory
Commission's staff as among the best managers of nuclear plants in
the United States.
Adding Constellation's nuclear plants in New York
and Maryland creates opportunities for leveraging nuclear operations
expertise and resources, the companies said yesterday.
Exelon has turned its back on new nuclear power projects, for the
balance of this decade, at least, because the power output from the
multibillion-dollar new plants could not compete with natural
gas-fired power plants in the absence of a carbon price.
Exelon will channel most of its capacity expansion into gas
generation, its officials say.
But Exelon has also embarked on a costly plan to increase the output
of its existing nuclear plants through uprates achieved by expanding
The uprates would add as much as 1,500 megawatts
of new generation if the Nuclear Regulatory Commission (NRC)
approves the projects. It is also expected to seek 20-year operating
license renewals on the remaining reactors that have not yet been
cleared for the license extensions.
Upgrading older plants protects profits
It is not clear whether the NRC will impose new regulations
affecting existing plants, uprates or plant license extensions in
response to the Fukushima accident.
The commission heard an update from its staff yesterday on the
ongoing safety review begun after the Fukushima accident, focusing
on the NRC's "station blackout rule," which deals with a nuclear
plant's ability to maintain required cooling of the reactor core and
spent fuel pools if all outside power is lost.
"We don't have the information yet to determine whether there are
possible improvements to be made to this rule or others, in light of
the events in Japan," NRC Chairman Gregory Jaczko said yesterday.
Exelon Chairman John Rowe said this week that he expects there could
be "incremental oversight or process changes" required by the NRC,
but until the details are known, the company was not projecting an
impact on its earnings.
However the NRC responds, Exelon and the rest of the industry face a
future of increased investment to keep old facilities running and
seek new commercial opportunities, analysts say.
The proposed merger
would considerably strengthen Exelon's future ability to raise
capital for such investments, executives of the companies said
Moody's Investors Service estimated last year that the utility
industry, with $200 billion in annual revenues, will have to invest
$20 billion a year in this decade to upgrade an aging asset base of
generators and transmission and distribution networks. More
investment will be called for as utilities pursue "smart grid"
strategies aimed at expanding customer services and safeguarding the
And in another 20 years, Exelon will face the need to replace
its current nuclear fleet with some combination of new generation
sources and energy savings.
An improved lobbying platform?
The announcement raised immediate questions of how Exelon's lobbying
platform in Washington might change.
Exelon was a leader in the power industry's unsuccessful push
through the U.S. Climate Action Partnership (U.S. CAP) coalition for
a cap-and-trade strategy to limit power plant emissions. A rising
price on carbon emissions would be a windfall for existing nuclear
Constellation was not a U.S. CAP member, although industry observers
said the two companies are philosophically close, supporting
competitive power markets and nuclear power as a largely carbon-free
"I think there is pretty high degree of alignment in
terms of their objectives. It's a merger that makes sense from that
vantage point," Tobyn Anderson, senior vice president of the
Lighthouse Consulting Group, a Washington-based public affairs firm.
Exelon's interests in federal transmission policy issues could
become more complex if the merger proceeds, some industry experts
The bulk of Exelon's nuclear operations are in Chicago, and it is
already concerned about the impact of excess low-priced wind power
from the Great Plains that flows into Illinois but cannot easily
move eastward because of limited transmission capacity. Surplus wind
power in Exelon's home service area puts pressure on its nuclear
plants to reduce output, and that strikes directly at the
profitability of nuclear operations, some analysts said.
For the same reasons, Exelon has commercial reasons to see wind
power move through the PJM Interconnection grid to the East Coast
rather than have large build-out of wind power occur off the
Neither Exelon nor Constellation supported Maryland
Gov. Martin O'Malley's (D) failed legislative proposal this spring
to support wind projects off Maryland's coast by requiring utilities
to purchase electricity from the wind farm.
objections were pivotal, according to people familiar with the
Who pays to improve the grid?
The Federal Energy Regulatory Commission (FERC) is preparing a landmark
rulemaking that would broadly allocate costs of future high-voltage
transmission lines, but is facing opposition from a powerful
industry group led by utilities in the Southeast, Michigan and New
"Exelon's Washington footprint will get bigger" if the merger goes
through, one energy sector official noted.
The industry will closely
watch whether Exelon supports FERC in this controversy.
Former FERC Commissioner Nora Brownell noted that Exelon expanded
its wind generation capacity through its acquisition of
John Deere Renewables last year.
"With wind assets and a diverse mix of assets,
I'm hoping they step up and support a more aggressive transmission
policy," she said.
The conclusion of the merger would end an eventful history of
Constellation's nuclear operations.
Constellation, like other U.S.
nuclear plant owners, foresaw a nuclear "renaissance" beckoning
after passage of the 2005 Energy Policy Act, with its promise of
$18.5 billion in federal loan guarantees for new plants and other
Facing possible bankruptcy because of electricity trading losses, it
struck a partnership with
EDF, the French utility giant, which
rescued Constellation with a $1 billion upfront investment and took
a 49.99 percent stake in Constellation's nuclear operations.
companies planned to invest in new U.S. reactors, beginning with
Constellation's nuclear plant site at Calvert Cliffs in southern
The French connection
But then the drop in natural gas prices poisoned the outlook for new
nuclear plants and Constellation abruptly called off the nuclear
marriage last year. EDF maintained a minority position in
Constellation's nuclear subsidiary. Exelon would take over that
business under the planned merger.
EDF said yesterday,
"We are studying the proposed terms and, as all
vigilant shareholders are undoubtedly doing, are evaluating the
value proposition and our options. EDF will also be mindful that the
integrity of our existing nuclear joint venture with Constellation
The deal, if consummated, would also end a series of unsuccessful
acquisition attempts by Exelon over the past decade that offered
opportunities to expand its nuclear portfolio.
Most recently, Exelon
gave up a hostile takeover bid for
NRG Energy in 2009, in the face
of opposition from NRG's stockholders. At the time, NRG was planning
an expansion of its South Texas nuclear plant. But this month, it
abandoned those plans, citing the uncertain regulatory climate in
the United States following the Fukushima accident.
After Exelon's NRG bid was rejected, Rowe commented,
shareholders have spoken, and Exelon will move on."
That path led to
Baltimore and Constellation...