UNITED STATES SENATE

COMMITTEE ON ENVIRONMENT AND PUBLIC WORKS

SUBCOMMITTEE ON CLEAN AIR, WETLANDS,

PRIVATE PROPERTY AND NUCLEAR SAFETY

TESTIMONY OF

STEVEN M. FETTER

MANAGING DIRECTOR

GLOBAL POWER GROUP

FITCH, INC.

NEW YORK, NEW YORK

MAY 8, 2001

I appreciate the opportunity to return to the Subcommittee on Clean Air, Wetlands, Private Property and Nuclear Safety to continue discussions about the appropriate role for the Nuclear Regulatory Commission (NRC) in the evolving utility competitive environment. Fitch is the international credit rating agency that resulted from mergers among three rating agencies: the New York-based Fitch Investors Service, the London-based IBCA Limited, and the Chicago-based Duff & Phelps. I will speak from the perspective of a member of the financial community as well as former Chairman of the Michigan Public Service Commission. I also note that I am not a nuclear engineering or nuclear physics expert, and in this regard I am representative of the large majority of investors and financial analysts who play some role in assessing the nuclear industry.

The manner in which the NRC carries out its responsibilities during the electric industry’s transition to competition will have a profound impact as to the role nuclear power will play within the restructured utility environment. As I have testified before, the NRC is at the center of investors’ perceptions of the financial risks facing the U.S. nuclear industry. In evaluating utilities that operate nuclear plants, debt and equity investors study closely the processes and actions of the NRC. To the extent that these regulatory responsibilities are carried out in a consistent and predictable manner, investors find comfort with the outlook for both individual nuclear utilities and the nuclear industry as a whole.

I am extremely encouraged by the actions of the NRC beginning soon after the July 1998 NRC oversight hearing. Responding to this subcommittee’s encouragement and under the leadership of NRC Chairmen Shirley Ann Jackson and later Richard Meserve, the NRC has welcomed interested stakeholders into the formulation and implementation of a reactor oversight process that focuses on objective assessment of safety-related factors. Using clearer standards based upon individual plant characteristics, the agency has been able to direct its attention for maximum impact. Moreover, leaving the somewhat nebulous Systematic Assessment of Licensee Performance (SALP) and Watch List behind, the NRC has increased the transparency of its processes to both the industry and the public through an NRC website that provides more information than has ever been available before.

The NRC’s initial experience with the processes of transferring and renewing nuclear licenses bodes well for the future. The agency set optimistic targets for both of these activities and then easily beat their deadlines. If the NRC can continue this positive track record when license renewal applications grow from a handful into double digits, and further streamline its regulatory activities while not compromising safety, it should secure the more than 20% of the nation’s power supply that comes from nuclear energy. Down the road, it is likely that the NRC will face even more important licensing issues involving new nuclear plants, both pre-and-post construction. It appears that the NRC will attempt to carry out its responsibilities in this regard with the same level of sensitivity that it has shown on reactor oversight and existing license transfers and renewals. Testifying before the Senate Energy and Natural Resources Committee last week, NRC Chairman Meserve concluded:

The Commission has long been, and will continue to be, active in concentrating its staffs’ efforts on ensuring the adequate protection of public health and safety, the common defense and security, and the environment in the application of nuclear technology for civilian use. Those statutory mandates notwithstanding, the Commission is mindful of the need to: 1) reduce unnecessary burdens, so as not to inappropriately inhibit any renewed interest in nuclear power; 2) maintain open communications with all of its stakeholders, in order to seek to ensure the full, fair, and timely consideration of issues that are brought to our attention; and 3) continue to encourage its highly qualified staff to strive for increased efficiency and effectiveness, both internally and in our dealings with all of the Commission’s stakeholders.

Chairman Meserve also called on the Congress to extend the Price-Anderson Act, which establishes a framework that provides assurance that adequate funds are available in the event of a nuclear accident, beyond its August 1, 2002 expiration. Without the framework provided by the Act, private sector investment in nuclear power would be severely chilled due to the potential risk of large liabilities. With NRC leadership on record with messages like these, investors will be more likely to support an expanded role for nuclear power.

For example, consider the significant change in perception since the time of the first in this series of oversight hearings. In 1998, the two most frequent topics upon which I was invited to speak were “Is there a place for nuclear power in the evolving competitive environment?” and “California’s success in the evolution to electric restructuring.” Today, the concerns are the same but you can juxtapose the words “nuclear power” and “California.” I have more confidence that nuclear power will be an integral part of the restructured environment than I am that California will soon remedy the flaws that it built into the state’s competitive framework.

Consistent with this bullish stance on the future of nuclear power is the action Fitch took last week in rating Exelon Generation Company LLC (ExGen), a newly formed non-regulated subsidiary of Exelon, the holding company created by the merger of Unicom Corporation and PECO Energy Company (see Attachment One: Fitch Press Release dated May 2, 2001). Fitch assigned an implied `BBB+’ rating to the senior unsecured debt obligations of ExGen – a respectable investment-grade rating -- notwithstanding the company’s ownership and operation of 19 nuclear plants at 11 locations.

Fitch found that ExGen’s significant nuclear exposure is mitigated by the diversity of the nuclear asset fleet, an excellent record as a nuclear operator, the sourcing and marketing capability of its trading operations, and adequate liquidity. Far from representing a financial drag on a utility entering the competitive landscape, ExGen’s well-conceived emphasis on nuclear energy, accompanied as it is by excellent plant condition, strong operational performance, and adequate decommissioning funding, seems to offer a competitive advantage.

Similarly, Fitch rated PSEG Power LLC’s (PSEG Power) initial offering of $1.8 billion of senior unsecured debt `BBB+’, despite its primarily merchant character after July 2002 and significant reliance on nuclear generation (63% in 2001 declining to 43% in 2005)(see Attachment Two: Fitch Press Release dated March 26, 2001). PSEG Power’s rating was favorably impacted by its location and participation in the Pennsylvania—New Jersey—Maryland (PJM) power grid, which facilitates a large and liquid energy market

There is much to support an expanding role for nuclear generation sometime in the future. Nuclear’s air quality benefits cannot be matched by fossil-fueled plants and nuclear fuel is not subject to the degree of volatility we have recently seen in natural gas prices in the western half of the United States. That all said, the elephant in the corner is disposal of spent nuclear fuel. Progress on choosing and developing a permanent site for the disposal of spent fuel is a necessity. Before we see progress on planning for the construction of a new generation of nuclear plants, the waste issue must be resolved. Any delay in achieving this goal likewise delays the ability of the nuclear industry to assist in the country’s future electricity needs.

ATTACHMENT ONE: FITCH PRESS RELEASE ON EXELON GENERATION COMPANY LLC, DATED MAY 2, 2001

ATTACHMENT TWO: FITCH PRESS RELEASE ON PSEG POWER LLC, DATED MARCH 26, 2001

ATTACHMENT ONE

Fitch Upgrs Exelon & PECO; Rts Exelon Generation Co. `BBB+'

02 May 2001 9:53 AM

Fitch-NY-May 2, 2001: Fitch today upgraded the senior unsecured debt of Exelon Corporation (Exelon) to `BBB+' from `BBB' and upgraded the senior secured debt of PECO Energy Company (PECO) to `A' from `A-'. Simultaneously, Fitch assigned an implied `BBB+' rating to the senior unsecured debt obligations of Exelon Generation Company LLC (ExGen), a newly formed non-regulated subsidiary. Fitch also affirmed the senior secured rating of Commonwealth Edison Company (ComEd) at `A-'. The Rating Outlook for Exelon and all of its subsidiaries is Stable. A complete recap of Fitch's rating action with respect to Exelon and its subsidiaries is shown below.

The upgrade of Exelon primarily reflects the holding company's strong consolidated credit measures, the predictable cash flow of its regulated distribution subsidiaries (PECO and ComEd), the availability of unrestricted dividend payments from its three core operating subsidiaries, the scale and diversity of its generation subsidiary (ExGen) and the contractual commitments between ExGen and the regulated distribution companies. The contractual arrangements between the subsidiaries substantially reduce consolidated business risk. The credit profile of Exelon and its subsidiaries is further strengthened by management's commitment to issue equity as may be needed to maintain a capital structure that is appropriate for the credit ratings. The company's significant nuclear exposure is mitigated by the diversity of the nuclear asset fleet, an excellent record as a nuclear operator, the sourcing and marketing capability of its trading operations and adequate liquidity.

The ratings upgrade of PECO and the affirmation of ComEd reflect the strength of the companies' actual and projected financial results and the absence of commodity price exposure. Both entities have entered into full requirements supply contracts with ExGen covering each company's provider of last resort (PLR) obligation. PECO's PLR obligation extends through 2010 and ComEd's through 2004. Both utility subsidiaries have implemented restructuring plans that resolved stranded cost concerns and insure a steady revenue stream from the regulated transmission and distribution businesses.

The `BBB+' rating of ExGen's senior unsecured obligations recognizes the scale and geographic diversity of the generation portfolio, the all-requirements sales agreements with PECO and ComEd that assure a predictable revenue stream for the term of the contracts, modest leverage and strong financial projections. Moreover, ExGen has a very competitive cost structure that is well positioned to produce consistent cash flow when operating on a merchant basis. Since a majority of the portfolio is base load nuclear capacity, it is expected to achieve a high level of dispatch in most price scenarios. The significant nuclear exposure is mitigated by the diversity of the portfolio, with 19 units at 11 nuclear stations. According to the independent engineer Sargent and Lundy LLC (S&L), the nuclear units are in excellent condition and improving in operational performance. Decommissioning funding provisions are adequate and long-term waste fuel storage at each site has been addressed, either through the inclusion of dry cask storage costs or re-racking of the spent fuel pools.

The power marketing and trading activity, Power Team, is closely linked to, and supports, the generation assets. The Power Team markets physical capacity and does not act as a market maker, thereby limiting its risk exposure. By maintaining a net positive supply position, ExGen is able to limit operational risk. Power Team also benefits from a sizeable amount of contractual transmission capacity. Risk management policies appear to be prudent.

ExGen's capital structure begins with a modest 35% debt ratio, growing to about 43% in 2003 (excluding non-recourse project finance debt). Due to the low amount of financial leverage, ExGen is expected to produce interest coverages (after capital expenditures) of 4-6 times (x) in the next ten years and over 2.75x in a stress scenario.

Exelon is the holding company created by the merger of Unicom Corporation and PECO. With the completion of the merger in October 2000, PECO and ComEd became distribution companies only; all power generating assets and wholesale power marketing operations of PECO and ComEd, along with other generating assets owned by Exelon, were transferred to the newly-created ExGen.

The following summarizes the rating actions announced today for Exelon and its subsidiaries:

Exelon Corp.

--Senior Unsecured Debt (implied) to `BBB+' from `BBB';

--Commercial Paper affirmed at `F2'.

PECO Energy Company

--First Mortgage Bonds to `A' from `A-`;

--Senior Unsecured to `A-` from `BBB+';

--Pollution Control Revenue Bonds (noncollateralized) to `A-` from `BBB+';

--Preferred Stock to `BBB+' from `BBB';

--Trust Preferred Stock to `BBB+' from `BBB';

--Commercial Paper to `F1' from `F2'.

Commonwealth Edison Company

--First Mortgage Bonds affirmed at `A-`;

--Senior Unsecured affirmed at `BBB+';

--Pollution Control Revenue Bonds (noncollateralized) affirmed at `BBB+';

--Preferred Stock affirmed at `BBB';

--Trust Preferred Stock affirmed at `BBB';

--Commercial Paper affirmed at `F2'.

Exelon Generation Company

--Senior Unsecured Debt (implied) assigned new rating of `BBB+'.

Contact: Robert Hornick 1-212-908-0523 or David Dubin 1- 212-908-0579, New York.

ATTACHMENT TWO

Fitch Expects To Rate PSEG Power LLC Sr Unsecured Debt 'BBB+'
26 Mar 2001 3:11 PM

Fitch-NY-March 26, 2001: Fitch expects to rate PSEG Power LLC's (Power) initial offering of $1.6 billion of senior unsecured debt 'BBB+'. Power is a wholly-owned subsidiary of Public Service Enterprise Group (PSEG) and the parent holding company of PSEG's portfolio of non-regulated domestic electric generation assets and energy trading organization. Power was formed in July 1999 to acquire, own and operate the electric generation assets of Public Service Electric and Gas Company (PSE&G). The Rating Outlook is Stable.

The rating reflects the scale and diversity of PSEG Power's generating portfolio, strong projected financial measures, competitive cost structure, and the sound sourcing and marketing capability of its energy trading and marketing organization. The company's overall risk profile also benefits from its location and participation in the Pennsylvania-New Jersey-Maryland (PJM) power grid, which is a large and liquid energy market located in the populous Mid-Atlantic region of the eastern US.

The credit rating also takes into consideration Power's primarily merchant character after July 2002 when the company's off-take contract with PSE&G expires, the potential for excessive new plant construction, evolving environmental regulations, and nuclear operating risk. The merchant risk is mitigated by the likelihood that Power will enter into a new power contract with PSE&G and/or other PJM utilities after expiration of its existing contract. Because of the scale and location of Power's assets, the company is well positioned to serve PSE&G's retail load, either directly or indirectly, well beyond the current contract period. Market competition could become more of a concern as Power expands its merchant facilities outside of PJM.

The high percentage of net cash flow derived from coal and nuclear units makes Power's fixed charge coverage sensitive to low gas prices. Conversely, coverage ratios benefit from high gas prices. Future cash flows also are sensitive to excessive new plant construction. The capacity over build stress case, produced the lowest fixed charge coverage, falling below 2.5 times (x) in 2001, but still averaged a relatively healthy 4x over the 10 year forecast period. Combining the over build case with a 10% increase in operating and maintenance expenses reduced the fixed charge coverage to a below 2x in 2001 and an average of 3.5x over the forecast period.

Power is pursuing a regional generation strategy focussed on the super-region of PJM, New England, East Central Area Coordination Agreement (ECAR), Virginia/Carolina and New York. Currently, 97% of Power's capacity is located in PJM, consisting of the formerly jurisdictional assets of PSE&G. The assets were transferred to Power in August 2000 in exchange for a $2.8 billion note. Power also owns a generating facility in New York (380 MW), is developing additional projects in ECAR and PJM and eventually plans to expand its New York facility.

The majority of Power's revenue will be derived from supplying PSE&G's provider of last resort PLR) load. A full requirements contract extends to July 31, 2002. Thereafter, Power's goal is to bid for 75% of the PLR load or enter into other contractual arrangements.

Facilities under construction or in advanced development total about 4,200 MW, including 1,854 MW in PJM, 2,000 MW in ECAR and 350 MW in New York. All the new facilities are natural gas fired simple cycle or combined cycle units and will increase the diversity of Power's generation mix and mode of operation.

In 2001, the generation mix is projected at 63% nuclear, 31% coal, 6% gas/oil and 1% pumped storage. By 2005, gas accounts for 38% of output, nuclear 43%, and coal 19%. Based on output, 93% of generation is currently base load, 3% intermediate and 3% peaking. The mode of operation changes in 2005 to 62% base load, 35% intermediate and 3% peaking.

Contact: Robert Hornick 1-212-908-0523 or Ellen Lapson 1-212-908-0504, New York.