Donald Fry: Parsing Exelon-Constellation merger benefits as PSC hearings loom

By Donald C. Fry

The merger proposal of the Exelon Corporation and Constellation Energy Group will surface in earnest on October 28. That’s when the Maryland Public Service Commission (PSC) has scheduled a status conference on the merger, to be followed by public hearings between then and December 5.

Typical of most major issues that come before the commission, the merger proposal has generated the prerequisite mountain of paperwork – 145 filings to the PSC from advocates and detractors alike since May, when the deal was announced.

The PSC hearings will begin on October 31 and include nine days of evidentiary hearings through November 10, followed by three sessions for public comment before commission members will make a decision on whether to approve the merger and whether to impose conditions on such an approval.

The public comment sessions will be held on November 29 in Bel Air, December 1 in Baltimore, and December 5 in Annapolis.

The merger, proposed last May, generated reservations and opposition, most notably from the Maryland Energy Administration.

But largely lost in coverage of the opposition to the merger are core elements of the deal that provide substantial value for Baltimore and Maryland in terms of real jobs, capital investment, and philanthropy.

Basically, the Constellation component of the merged company will remain here and a major component of Exelon’s operation will move here as well. The growth divisions of the combined company – its wholesale and retail power business and its renewable energy business – will be headquartered in Baltimore in a new or substantially renovated building of up to 500,000 square feet that will cost between $95 million and $120 million to build.

The merged company’s total direct investment in Maryland of between $270 million and $306 million will also include:

  • $100 credit to each BGE customer,
  • A $45 – $55 million investment to develop 25 megawatts of renewable energy in Maryland,
  • $10 million to help spur the development of electric vehicle infrastructure, and
  • $4 million to support the EmPower Maryland initiative.

The companies are also committed to at least $10 million in annual charitable giving in Maryland for at least 10 years.

BGE will still remain in Baltimore as a separate subsidiary managed from BGE headquarters and BGE jobs will not be affected for at least two years.

The Maryland Energy Administration’s PSC filing, while acknowledging that Exelon and Constellation “have made a good faith effort” in their merger proposal, takes full advantage of the state’s high bar for utility mergers by seeking to secure even more benefits.

In asking the PSC to reject the merger proposal as submitted, the MEA’s filing with the PSC gropes for leverage to bolster the merged company’s financial commitments.

Among other things, the state’s filing picks at the merger by essentially arguing that benefits of the merger are not really benefits. Examples include:

  • The state contends that the merged company’s commitment to renewable energy in Maryland is too low, while acknowledging that Exelon has a strong company-wide commitment to renewable energy. The state wants Exelon to make a larger commitment to Maryland’s ambitious renewable energy goals.
  • The state dismisses Exelon’s commitment to building a LEED building in Baltimore as not really a benefit because Baltimore City would require the building to be LEED-certified anyway.
  • The state pooh poohs the merged company’s proposed $10 million commitment to electric vehicle infrastructure because “Maryland is already on its way to developing a significant electric vehicle infrastructure.” Exelon should agree to “significant additional commitments” in order for the deal to be considered as providing real direct additional benefit to BGE customers, the state argues.
  • The state contends that the $4 million contribution to the EmPower Maryland initiative is simply too low for such a big company.

These are anecdotal examples in an admittedly complex proceeding, but you get the gist of the state’s position.

Other objections include concerns that BGE would get lost in Exelon’s corporate structure and that the merged company will be so large a power generator that it would have too much control of the mid-Atlantic energy market, potentially driving energy prices up.

But the companies responded by committing to placing BGE’s president on Exelon’s executive committee and recently agreed to sell several plants and to other limitations that adequately address concerns about potential market dominance.

Most national analysts reportedly expect the merger to be approved with conditions that the companies can live with. None of the merger’s detractors are advocating outright rejection by the PSC, they note.

The truth is, we are in a period where de-regulated industries are consolidating to become more competitive. As far as mergers go, this merger is clearly beneficial for Maryland and its citizens.

From the outside, the PSC approval process appears to be a game of high stakes poker. The state’s objective, painted in the light of what is “in the best interest of the ratepayers,” is to secure as many concessions as possible from the companies in order for them to gain approval for the merger. Let’s hope that the State of Maryland doesn’t overplay its hand, thereby threatening the economics of the merger from a business perspective.

A rejection of the deal would send an inopportune negative message to the national business community that Maryland neither projects a welcoming tone to business nor respects the private sector as a partner, instead of an adversary.

That wouldn’t be a good message in a struggling economy where the focus is on “jobs, jobs, jobs.”

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