Exelon's Rowe an unlikely booster for shale gas

The shale-gas revolution has not served John W. Rowe's best economic interests. Nevertheless, the chief executive of Exelon Corp. has become an evangelist.

Rowe, whose Chicago company owns Peco Energy Co., said in an interview Friday that before shale gas came along, Exelon made so much money generating power in high-priced electricity markets that one of his company's main concerns was "how to keep people from taking [the profits] away from us."

Fast forward three years. An abundance of gas produced from formations like Pennsylvania's Marcellus Shale has driven down gas commodity prices and, by extension, the price Exelon gets for generating electricity. Exelon's stock today is trading at half its 2008 peak.

"You watch next year our earnings will be down compared to this year, and the principal reason for that will be low natural gas prices," said Rowe, who was visiting Philadelphia to speak to Wharton Energy Conference 2011 at the Union League.

"Low gas prices are good for America, not quite so good for Exelon," said Rowe, who is retiring next year after his company completes a planned merger with Constellation Energy Group of Baltimore.

Rather than erecting barriers to natural gas, Rowe believes government should embrace the newfound domestic fuel source that produces less pollution than other fossil fuels such as coal or petroleum.

"What we have today in Pennsylvania, in the whole Northeast, is the great domestic blessing of cheap natural gas," he told the Wharton audience. "It gives us a bridge, at least a 10-year bridge, maybe a 20-year bridge, in which we can produce much cleaner energy at a low cost. That's a unique blessing."

Lower gas costs are suppressing more than electricity prices, said Denis P. O'Brien, Peco's chief executive, who joined Rowe at the Wharton event. O'Brien said that the utility's half-million natural gas customers in suburban Philadelphia are spending $300 million less a year - a 50 percent reduction - than when gas prices peaked in 2008.

"That's a significant energy savings," he said.

The rapid emergence of shale-gas in recent years - it now accounts for about a quarter of the nation's natural gas supply - has forced government officials and corporate planners to recalibrate their outlooks.

Exelon, the nation's largest producer of nuclear power, is no longer looking at building new reactors because of shale gas and this year's disaster of Japan's Fukushima reactors, Rowe said.

"I cannot build a new nuclear plant to compete with gas." Rowe, 65, told the Wharton audience. "I cannot build a new nuclear plant to compete with what China can build. . . . But I can build gas-fired capacity in ways that allow Pennsylvania to compete with China."

Rowe's visit was part of what Exelon officials are calling his "farewell tour" before his retirement after 14 years at the company's helm. He says his greatest achievement was engineering the merger in 2000 of Chicago's Unicom with Peco to form Exelon, a Fortune 100 company that will become the nation's largest utility if regulators approve the Constellation merger.

He was a strong advocate for climate legislation, which failed in Congress in 2008 and now appears to have little political support. The proposal would have created a market-based structure to penalize utilities that produce greenhouse gases, and reward those, like Exelon, that have jettisoned dirty power plants.

"While our society continues to debate the climate change question, our conviction remains that the science is clear - climate change is real and our modern, industrial world is a significant contributing factor," Rowe wrote in an update this week of Exelon 2020, the company's strategic plan on reducing carbon emissions.

Now Rowe, as part of his closing act, is campaigning to persuade Congress and the Obama administration to stay the course on proposed rules to limit ozone pollution or toxins such as mercury and arsenic.

He said the Chicago utility he ran, ComEd, decided in 1999 to sell its coal-fired power plants to concentrate on cleaner energy sources to prepare for stricter regulations it knew were coming. Some managers of coal-dependent utilities, who are now lobbying to relax the rules, made different bets.

"They knew the new regs were coming, they didn't work on getting ready to comply and now they're saying 'We didn't have time to comply,' " said Rowe. "We knew they were coming when we sold the ComEd coal fleet 11 years ago. This is no great shock. You're supposed to be preparing for these things.

"They would say with some justification that some of their utilities are lower-cost than ours," he said. "Well they won't be when they do the cleanup they're going to have to do."

A major part of the message he delivered in Philadelphia is that government should allow market-based incentives to work along with enforcing the Clean Air Act to find the cleanest, cheapest solution.

He dismisses the arguments that regulators butt out altogether - government has a role to establish rules to keep the market honest, and to protect the environment and public safety.

"Hardly any real business person believes you have either all government or no government," he said.

But government attempts to dictate which energy source should prevail inevitably produce costly results, he said. While political interests promote expensive solutions ranging from solar power to clean-coal technology to generate green jobs, the most cost-effective solution, natural gas, is staring the country in the face, he said.

"We've got one party that always wants wind and solar, we've got another party that wants coal and nuclear," he said. "They're all well intentioned in their way, but the market is telling them, 'Oops, we just came up with something that both of you want, and it's domestic and it's cheaper.' "

He acknowledges that natural gas is imperfect. He said the industry must still improve controls to reduce methane escaping into the atmosphere from well sites and pipelines, and regulators must be vigilant to maintain best practices to reduce the risk of contaminating groundwater supplies.

But he said he believes most fears about hydraulic fracturing, the technique that drillers are using to unlock natural gas from tight shale formations, "will mostly prove untrue."

And he acknowledges that the greenhouse-gas benefits of natural gas begin to recede at some point in the future. Though more efficient and cleaner than coal, natural gas still produces greenhouse gases. But for now, he says that cleaner alternatives are not as competitive.

"Somebody who really believes that the climate problem is the biggest problem we face will correctly point out that gas only deals with it for 20 years, and then the carbon in gas becomes a major impediment," he said. "Well, 20 years is a long time. Better that we should do something now than wait for a perfect solution 20 years down the road."