In October 2008, when Crane was COO, Chicago-based Exelon launched a hostile take-over bid for NRG Energy Inc. NRG was a merchant generation company, which means it sells electricity wholesale in deregulated markets rather than obtaining a regulated return like a traditional utility. The trading generation is more exposed to commodity prices and therefore more risky, but it also has the potential for windfall gains if the market gods are with you. Exelon was, and remains for now, a hybrid of the two companies.
When Exelon announced the NRG offer, Crane started the speech by noting that it would create the largest merchant fleet in the United States. CEO John Rowe then added, “I firmly believe that climate change legislation is coming and that the value of Exelon’s low-emission nuclear fleet is clearly benefiting.”
It all made sense at the time. Natural gas prices were high, which meant electricity prices were high too – and nuclear power plants in the Midwest could earn big margins. Profits from Exelon’s generation business had more than doubled in three years and accounted for three-quarters of the company as a whole. The following month’s presidential candidates, Barack Obama and John McCain, were both in favor of a carbon cap-and-trade system, also in favor of nuclear power. In addition, the financial crisis of last fall had crushed the NRG share price.
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And yet, none of this lasted. Natural gas has headed into a decade-long bear market, weighed down by the boom in shale production. Wholesale electricity prices have also suffered from stagnant demand and the growing role of renewables. Meanwhile, cap-and-trade wiped out the House before dying in the Senate, and Republicans looked at climate change. NRG got embroiled in the credit crunch and fended off Exelon’s attention.
Nonetheless, when Exelon announced a $ 10 billion deal for Constellation Energy Group Inc. in 2011, Rowe went out of his way to stress that he still expected a rebound in electricity prices. He noted that some analysts had been “concerned” that Exelon might instead buy a fully regulated company. If only that was the case. A year after the deal was struck, Exelon was forced to cut its dividend as production profits plummeted. A year later, in 2014, he announced another deal, for $ 12 billion this time, for a regulated utility operator, Pepco Holdings LLC. It was at this point that Crane, now in charge, pushed back discussions about state subsidies for ailing nuclear power plants.
Deregulation elevated power generation to something like a sexy business enterprise starting in the 1990s, and the collapse of Enron Corp. – as well as several generator bankruptcies – did not completely deter this. It took a combination of the financial crisis and cheap shale gas to force a final judgment (at least for listed generators; sophisticated private equity players have performed well). Besides the psychological scars of 2008, zero interest rates suddenly made utility dividends less run down. Especially since investment in networks resumed and regulators kept rates of return stable even as bond yields fell.