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A strong settlement for Constellation-Exelon merger

Our view: Gov. Martin O'Malley addressed the most important issues posed by the Constellation-Exelon deal by focusing on the long-term impacts to BGE

11:00 PM EST, December 14, 2011

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Gov. Martin O'Malley may not have gotten Exelon to bump up the $100 rate credit it promised to Baltimore Gas and Electric customers as part of its proposed merger with Constellation Energy, but he secured concessions that will be far more valuable to Maryland ratepayers in the long run. The settlement the governor plans to announce Thursday includes a vastly greater commitment to renewable energy and other new power generation than Exelon had ever agreed to before. It contains millions to help improve energy efficiency and assist low-income customers who have trouble paying their bills. And it is likely to produce substantially more short-term and permanent jobs than the energy company's initial proposal.

That's all well and good, but the most important concessions the governor secured are subtler. The real risks posed by this merger were that it could lead to long-term increases in electricity rates that would dwarf any one-time rate credit, that it could expose BGE to greater risk, and that it would put ultimate control of BGE in an out-of-state corporation. The settlement the governor reached doesn't eliminate those concerns, but it reduces them in ways that had not previously seemed possible.

Perhaps the single most important concession Exelon agreed to is a provision that under certain circumstances — such as the bankruptcy of Exelon or a major subsidiary, a credit downgrade or the failure to comply with Maryland Public Service Commission rules and orders — the PSC could initiate hearings to force the company to spin off BGE. That's an idea the state Office of People's Counsel had floated, and one that Exelon had seemed unlikely to accept. It provides Maryland with a failsafe option should its greatest fears about the merger come true.

A great risk of the merger was the degree to which it would concentrate market power in the hands of the new energy company. Within the section of the electric grid that services BGE customers, the new corporation would have controlled between a quarter and a third of the supply, giving it excessive power over the prices its own customers would be forced to pay. Exelon had already agreed to sell off three coal-fired plants, but now it is agreeing to conditions on the sale that will prevent them from going to some other major player in the region's generation market. Exelon also agreed to build substantially more new generation in the immediate Baltimore area than it previously had, which should, in the long run, help lower prices.

Other elements of the governor's settlement strengthen the financial firewalls between BGE and Exelon (and its risky energy-trading operations) and require that BGE's board have members who are independent of Exelon and that a majority of the board live or work in the BGE service area. That all reduces the potential for problems posed by BGE becoming part of a much larger corporation, and with having its operations lumped in with Exelon's two other regulated utilities.

In all, Exelon has agreed to build more than 10 times as much new generation as in its initial offer and to effectively double the amount of solar and onshore wind generation that Maryland has now. That pushes the state much further toward its renewable-energy goals and will help jump-start the green energy industry in the state. That will pay much greater long-term dividends in terms of public health than a one-time rate credit would.

We were strongly critical of the governor two years ago when he objected to a proposal by Electricité de France to buy half of Constellation's nuclear business. At the time, it appeared that Mr. O'Malley, an old foe of Constellation and its CEO, Mayo A. Shattuck, was simply trying to extort as much as possible from a deal that had little direct impact on BGE and its customers. This time is different, and Mr. O'Malley's efforts were right on target. This deal posed a substantial and ongoing risk to BGE and its customers, and as such, he was right to put his focus not on how much cash he could squeeze out of the company right now but on long-term issues of governance, market power and Maryland-based energy development. During his time as governor, Mr. O'Malley has secured hundreds of dollars in rate credits for BGE customers, but for most families, that money has come and gone without a second thought. The terms of this deal will benefit ratepayers every single month.

That's not to say that an Exelon-Constellation merger is a great thing. It still takes a corporate headquarters out of Baltimore, and as EDF officials have pointed out, it greatly diminishes the chances for the construction of a new nuclear reactor at Calvert Cliffs and will almost certainly result in the loss of high-paying jobs here. But the criteria on which the Public Service Commission can judge this deal are narrow: Does it provide benefits for BGE customers, does it produce no harm for them, and is it in the public interest? With the terms Mr. O'Malley secured, the commission should be able to answer all three in the affirmative.