By Hanah Cho, The Baltimore Sun
October 30, 2011
As Exelon Corp. continues to pursue Constellation Energy Group, the Chicago energy giant is pointing to a decade-old deal with a Philadelphia utility as a success that should reassure wary Marylanders — and regulators — about its intentions toward Baltimore's last Fortune 500 company.
Maryland officials, consumer advocates and others are not convinced that the proposed $7.9 billion Exelon-Constellation deal would benefit consumers and preserve local control of Baltimore Gas and Electric Co. On Monday, Maryland regulators will begin their review of the deal and hear from critics concerned about a range of issues from service levels to charitable contributions.
But in Philadelphia, a look at the deal involving Peco Energy shows that, on the whole, the Chicago power company has kept its promises to ratepayers and regulators. In 2000, Peco agreed to lower rates and improve service, while committing to maintain its charitable giving and workforce levels for several years, easing regulatory approval.
"It paid off here," said former Pennsylvania Gov. Edward G. Rendell, who was mayor of Philadelphia when the merger between Peco and Chicago-based Unicom Corp. that created Exelon was announced in late 1999.
"I think Baltimore … has nothing to worry about," Rendell added, emphasizing that in Philadelphia's case, Exelon believed that "local autonomy is important and that local management is important."
But the job of persuading Marylanders to accept an out-of-town corporate parent isn't easy. Two previous attempts by Constellation to sell itself failed; the Maryland Public Service Commission has the power to veto the proposed merger.
Some Maryland officials and consumer advocates question how independent BGE would be under Exelon and fear that the utility would have to compete for resources with Exelon's other businesses. (Besides Peco, Exelon owns Chicago utility Commonwealth Edison.)
Critics are seeking protections and concessions beyond the $250 million incentive package the two companies have proposed to win over regulators and naysayers in Maryland.
Lance Haver, Philadelphia's director of consumer affairs, has mixed feelings about Peco's merger and cautions Maryland regulators to be vigilant. While acknowledging that Peco's customers got rate reductions and other benefits, Haver said those protections should have been greater, given that deregulation of the electricity market has not lived up to its hype.
"The promise that deregulation would lead to all this competition to bring prices down and lead to innovative technology and new generation has turned out not to be true," said Haver, who as head of another consumer advocacy group pushed for concessions at the time of the merger.
"So as the [Maryland] Public Service Commission looks at this merger, they know that. They have a much better picture of what restructuring has brought and should be able to do a better job of protecting Baltimoreans."
The marriage between Peco and Unicom came as electricity deregulation was starting to shake out in Pennsylvania. The transition took more than a decade, as one of the last rate caps came off in Peco's service region at the end of last year.
Executives at Peco and Unicom said at the time of the merger that it would create size and scale, enabling the new company to be more competitive in a changing market.
But Pennsylvania officials, consumer groups and environmentalists worried that the merger would hurt consumers, minimize local control and reduce philanthropic contributions — similar to concerns being raised now by groups in Maryland.
The company agreed to cut rates by $200 million over several years, keep at least 1,100 employees in its Philadelphia headquarters until 2008 and continue to donate to area charities at the same level through 2003.
Adjusting for inflation, Peco's rate reductions amounted to a $200 credit per residential customer — double what Exelon and Constellation officials are offering each of BGE's 1.1 million residential ratepayers, according to outside consultants hired by the Maryland Public Service Commission staff.
Exelon disputes that analysis, saying the Peco rate credit was closer to $100.
Sonny Popowsky, Pennsylvania's consumer advocate on utility issues then and now, said Peco "fairly" responded to concerns about preserving local management and control.
"Peco has always been an essential part of Philadelphia and that was part of the concern with that merger," Popowsky said. "I think they have maintained their Southeast Pennsylvania focus reasonably well."
In an interview last week, Peco CEO Denis P. O'Brien said the company emerged from the merger as a stronger utility.
O'Brien — who followed his father's career at Peco more than 30 years ago — described the utility's reputation as "very involved in the community, delivering good service, being very responsive and a company that [customers] could count on."
At the time of the merger, Peco had about 2,800 workers in its utility business. Today, the company has 2,400.
Peco spokeswoman Catherine Engel Menendez said the company pledged not to cut linemen and to maintain staffing levels to "ensure efficient and safe operations." Most of the workforce reductions, she said, came from attrition and the consolidation of duplicate positions.
Exelon cut more than 3,000 jobs within a year of the merger, though it's difficult to say how many of those cuts came from Peco's other operations, said Exelon spokeswoman Judith Rader. Some positions were eliminated through consolidation, while many employees moved to different Exelon businesses.
Exelon has promised not to involuntarily lay off workers at BGE, which employs 3,400, for at least two years after the merger is completed. Exelon officials have not said how many Constellation jobs might be affected by the merger, but cuts are expected at the Baltimore headquarters.
Emil Meyer, president of the International Brotherhood of Electrical Workers Local 614, the union that represents Peco meter workers, linemen, technicians and others, said the utility's workforce has remained "relatively stable."
"Peco Energy had a family-based business culture when I first entered their employ 40 years ago, and that culture fundamentally still remains intact today, despite the myriad of challenges and changes that the ever-evolving business climate has thrown our way," he said.
Rendell feared that Peco, with its corporate headquarters in Chicago, wouldn't "care very much about us" when it came to charitable, civic and political causes. But that was not the case, the former governor said.
O'Brien said Peco is probably more engaged in the community now because the utility's growth prospects are tied to economic development in the Philadelphia region.
"As a utility, you're not successful unless the community and the regions you serve are successful," said O'Brien, who serves on numerous boards of Philadelphia-area nonprofits.
Exelon and Constellation have pledged to maintain $7 million in charitable contributions in the Baltimore region for the next decade.
In Philadephia, Peco continued charitable contributions of about $3.2 million through 2003 as promised and donated at the same level for years after. Peco made $4.6 million in gifts last year and is projected to donate $5.5 million this year.
Exelon officials say the corporate parent's charitable foundation and other businesses have given millions more to Philadelphia-area charities and civic causes, including a welcome center at Valley Forge National Historical Park.
Jill Michal, president and chief executive of United Way of Southeastern Pennsylvania, described Peco and Exelon as the group's "most supportive partners," having donated more than $1 million a year for more than a decade.
But Peco came under fire for keeping secret $17 million in donations to a nonprofit group with ties to once-powerful state Sen. Vincent J. Fumo, who was convicted in 2009 of corruption charges related to the nonprofit as well as other offenses. Federal prosecutors said Fumo used the nonprofit's money for personal gain.
Peco agreed to make those contributions in 1998 and 2000 as a result of deals with Fumo, who agreed to drop legal challenges opposing the company's deregulation plan and its merger with Unicom. The gifts were revealed in 2003 after an inquiry by The Philadelphia Inquirer.
While a review by a retired federal judge found that the large donation was legal, Exelon CEO John Rowe acknowledged that it was wrong for Peco to keep the gifts a secret. Exelon implemented new rules — still in place — that call for a review of all donations greater than $50,000 and even greater scrutiny of gifts larger than $1 million.
Apart from the potential impact on charitable giving, Philadelphians worried about how the merger would affect Peco's service, especially since Exelon's Commonwealth Edison utility had drawn criticism for unreliable service.
Since 1999, Peco has reduced the average number of outages by 19 percent and cut their average duration by 15 percent, according to the most recent data submitted to the Pennsylvania Public Utility Commission.
Peco has met standards for reliability and storm response over the past decade, said Jennifer Kocher, a spokeswoman for the Pennsylvania energy regulator.
For instance, within 72 hours, Peco restored electricity to 99 percent of the 511,000 customers who lost power in the aftermath of Hurricane Irene — better than the statewide average.
In contrast, BGE endured fierce criticism in the aftermath of Irene. The Baltimore utility restored power to more than 95 percent of its 756,000 affected customers within five days, but some were left in the dark for up to eight days.
Outside consultants hired by the Maryland Public Service Commission said Exelon's Peco and ComEd subsidiaries have demonstrated a higher level of reliability than BGE.
John Hanger, a former Pennsylvania energy regulator and founder of an environmental group that pushed for concessions in the merger, said Peco has taken steps to improve reliability over the years.
Service concerns for Peco "were identified in the merger process as something … the new management should fix," said Hanger, whose consulting firm was hired by Exelon this year to do work related to federal clean-air rules. "They fixed it by spending the money to do it."
Peco officials said spending for operations and maintenance as well as for capital projects, such as replacing poles and wires, has increased steadily over the past decade. The company is expected to spend $714 million for operations and maintenance this year and $447 million more for capital projects.
Peco's O'Brien said he has had "tremendous autonomy" and has received the financial support to run the utility.
If the Constellation-Exelon merger is approved, O'Brien would become chef executive of Exelon Utilities, which would oversee the utilities in Baltimore, Philadelphia and Chicago — a move that some in Maryland have criticized.
O'Brien described his role as a facilitator who would bring the three utilities together to share best practices. BGE chief executive Kenneth W. DeFontes Jr. would retain his job under the new combined company.
"I think we've demonstrated our credibility and established trust in Philadelphia," he said. "And I'm extremely confident that that will develop in Maryland also."
By the numbers
1.2 million electricity customers (residential and business)
700,000 gas customers
2,300 square miles of service territory
7,198 megawatts peak load
1.6 million electricity customers
500,000 gas customers
2,100 square miles of service territory
8,932 megawatts peak load
Peco before and after merger
1999: $3.2 million
2011: $5.5 million (projected)
1999: 2,800 employees
2011: 2,400 employees
Operating and maintenance
2001: $587 million
2011: $714 million (projected)
2001: $248 million
2011: $447 million (projected)
Source: Peco Energy
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