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Exelon: Nuclear is security hedge against natural gas system failure

The risk of natural gas pipeline failures could be the next piece of Exelon Corp.'s regulatory efforts to pitch state, federal and grid officials on the value of preserving nuclear generating assets as both a national security and climate hedge.

Fresh off of a pair of decisions in federal courts rejecting challenges to nuclear subsidies, Exelon on Aug. 2 posted second-quarter results slightly above analysts estimates but weaker year-over-year due largely to plant refueling costs and lower energy margins overall.

The decline was partially offset by the company's receipt of zero emission credit, or ZEC, payments in New York, with Illinois payments set to begin in the fourth quarter. The company touted the court decisions before appeals from a coalition of power generators play out in federal appellate courts this summer.

"These wins are strong affirmations of the ZEC program design," Exelon CEO and President Chris Crane said, noting similar efforts underway in Pennsylvania to subsidize its Three Mile Island facility. "It's important to note that the economic challenges facing [Three Mile Island] impact all nuclear plants in Pennsylvania."

Gas system risks

Beyond efforts in state legislatures and utility commissions, Exelon is also focused on federal policy initiatives, namely a forthcoming study by the U.S. Department of Energy to evaluate baseload resources. Where Exelon has previously identified provisions in the Federal Power Act giving the DOE authority to mandate operations of certain facilities in the event of emergency or war, the basis for such planning is becoming increasingly clear.

Addressing the broader shift toward natural gas, Joe Dominguez, Exelon executive vice president for governmental and regulatory affairs and public policy, suggested the "long-term disruption of the natural gas pipeline system" could engender major risks to grid reliability. That would add a new policy rationale to programs that compensate nuclear for its zero-carbon attributes at the state level, which Exelon expects the Federal Energy Regulatory Commission to respect.

"We have to, as an industry and as a country, come to grips with this potential risk to our system and examine the possibility of multiple pipeline failures," Dominguez said. "That's something that currently is not being modeled and needs to be modeled."

Any study evaluating the impact on the grid of gas pipeline failure would, in Exelon's view, likely demonstrate that policy support for generation resources with on-site fuel supply, like nuclear, would be a favored strategy to balance the broader power mix in major wholesale markets.

"It's more clear to us now than ever that federal wholesale markets need to evolve to fully incorporate attributes like resiliency, fuel diversity and environmental qualities of the generation resources," Dominguez added.

ExGen core for now

The temptation to spin off any segment of the company's competitive Exelon Generation Co. LLC subsidiary, whether in a direct sale or IPO, has not yet reached the point where Exelon could find more value in the holdings versus its ownership of the combined entity.

"If we ever found that the value was constrained or our strategic group was hampered based off of the company's being together, you could have that conversation to create value," Crane said when asked about the value proposition of spinning off some or all of ExGen from its utilities segment. "But there's no reason that having them together and using the synergies that we have between having the two companies shouldn't be valued fairly for that as we execute on our strategic plans."

Potential complications of such a spinoff would include the entities' ability to secure investment-grade credit, access to the capital markets and near-term challenges posed to the commodities trading business.

"There's all kinds of hair around that, but we like what we're doing right now and the way that we're creating the value, and we think we are differentiating ourselves from any other merchant generator in the business," Crane added.

While executives did not address the progress of any prospective sale of assets owned by its ExGen Texas Power LLC entity, management said the company is always looking to tee-up supply contracts in the Texas market and is likewise open to retail acquisitions to grow its load base.

"If there's an opportunity in the future to bolt on, more retail would be a good fit to our portfolio, we would definitely do that," Constellation Energy Group Inc. CEO Joseph Nigro said.