The retail electricity markets will continue to evolve in "fits and starts" in those states that have competition, Exelon CEO John Rowe told the Energy Bar Assn in Washington.
     He was "bullish" on wholesale power markets.
     "When you get the politics right, the markets will work," he said.
     Retail markets were hindered by the Enron scandal, he added, raising the question -- "did Enron and California deserve each other?"
     Politicians in Illinois and Pennsylvania were more "practical" than some in California, he noted.
     A lot of time is now being spent in the industry to figure out what works and what doesn't but "retail is here to stay," Rowe affirmed, even if it is working in a "haphazard way."
     Rowe reported that large customers are switching repeatedly and that doesn't mean retail isn't working, he said.
     Residential customers aren't switching and that has been blamed on a failure of competition but Rowe disagrees.
     Utilities are offering low-priced and reliable power while retailers can't figure out how to deliver electricity more cheaply.
     Residential customers view power in a complicated way, he said.
     Rowe used the example of Illinois and Pennsylvania to support his point. In Illinois, ComEd has competitive prices, he said, but customers are unhappy.
     Yet, in Pennsylvania where the utility has higher prices, customers are very happy.
     It's a matter of customer service and good marketing, Rowe said.
     As for large customers, they are flip-flopping to get the best price even if that includes going back on regulated rates.
     That ability will become more "restricted" in the months and years ahead, Rowe predicted.
     Regulators have tried to make wholesale power more transparent to residentials such as in Massachusetts where short-term auctions were used.
     "Maybe too short," Rowe observed.
     He suggested that the industry consider the New Jersey vertical slice model, something that the Illinois Commerce Commission found its stakeholders favored.
     The model offers the best way to produce the lowest-cost power, he said.
     Several issues still swirl around the best model to use such as how long the contracts should be.
     New Jersey uses three-year terms but suppliers want five-year, Rowe said, "makes a lot of sense," he told the EBA.
     The longer-term contracts are more "stable" than the three- and six-month contracts now in common use.
Other issues include who monitors market power.
     Is it FERC?  RTOs?  States?
     It will be a "bloody war" but FERC will win, Rowe predicted.
     Then the question will become will market power be regulated along strict jurisdictional lines or will regulators make "reasonable accommodations" to the states that want a say in the process.
     Exelon does believe that more generation is needed but Rowe is more interested in the markets developing signals that urge investing.
     Although Exelon has put a small amount of capital toward putting in passive nuclear reactors, Rowe doesn't believe the regulatory climate is right for investing in building plants.
     "We are ready to build coal plants under the right circumstances," he reported.
     Before investors are ready to build new capacity, Rowe believes more focus will be on load management issues.
     It's a matter of what conditions can a company like Exelon build under.
     Rowe has to balance his POLR duties by matching retail auctions with wholesale auctions so regulators and the industry can see Exelon isn't using market power, he explained.
     Rowe calls this a "confusing" time where he sees three business models all working at the same time.
     One is the classic model where utilities build generation under a rate base with limited competition.
     The last is retail short-term auctions to serve those who don't switch.
     Will Congress adopt an energy bill?
     It matters, Rowe said, and he warns to expect more energy efficiency laws.
     Retail is going to be in the mix and time will tell which model it fits.
     Looking ahead, Rowe thinks FERC will continue to press for RTOs but "more patiently than in the last several years."
     RTO formation will be slow but he thinks they provide benefits.
     Many CEOs look at competition as a failure, Rowe said, but "we are inclined to make a virtue out of it."
     Published in Restructuring Today on November 4, 2004