State suggesting sweeteners to Constellation-Exelon deal

As Constellation Energy Group prepares to sell itself to Chicago-based Exelon, critics are advancing proposals to make the deal more palatable to Maryland customers.

The state's consumer advocate is proposing a three-year freeze on rate increases after the merger to ease the transition to out-of-town ownership.

The Maryland Energy Administration is questioning whether the $100 credit the companies have proposed for Baltimore Gas and Electric Co. customers is enough, given the savings the companies expect to realize from the merger.

And the energy administration and the Maryland Office of People's Counsel are expressing doubts that the deal would produce job gains in Maryland, as Exelon and BGE parent Constellation have said.

In testimony filed with the Maryland Public Service Commission, consultants hired by the state, the commission's staff and the Office of People's Counsel say the $7.9 billion merger is a bad deal for consumers.

Their testimony suggests the outlines of the deal that officials are trying to get — one that would preserve local control of BGE, produce more clean energy and put money in customers' pockets.

The Public Service Commission, the state's energy regulator, is to begin hearings on the merger Oct. 31.

The concessions sought by the state, consumer advocates and others are not unusual in energy deals that require regulatory approval. Failure to reach agreement on rates and other issues has doomed two earlier attempts by Constellation to sell itself.

The energy giant did agree to measures proposed by the commission to gain approval for its deal to sell half its nuclear business in 2009.

"Given Maryland's history regarding these things, I don't think anyone should be surprised that there would be parties in the case that want more," said Paul Patterson, an analyst at Glenrock Associates in New York. "How much more they will get is another story."

Exelon President and Chief Operating Officer Christopher M. Crane said Tuesday that the company is reviewing testimony and proposals by various stakeholders.

"In some cases, it appears to be overreaching," Crane, who would be the new chief executive of the combined company, said at a conference of investors. "We think we understand the genesis of the statements, and we're working to provide our rebuttal filings."

While Exelon and Constellation officials say they welcome input from stakeholders, they say the current deal would provide significant benefits to BGE ratepayers and the state. The two companies are expected to file a response to the state and the Office of People's Counsel on Oct. 12.

Recognizing the state's regulatory history, Exelon and Constellation did not wait to tout the deal's benefits. In announcing the merger in April, the companies proposed a $250 million incentive package that would include financial contributions to the state's green energy goals and a commitment to maintain Constellation's charitable giving in the state for at least 10 years.

The hallmark of the companies' proposal was a $100 credit for each of BGE's 1.12 million households.

That is the same amount that BGE customers received in Constellation's 2009 deal to sell half its nuclear power business to the French utility EDF.

Matthew I. Kahel, a consultant for the state, questioned whether $100 would be enough. After reviewing the numbers, he concluded that the companies might be understating the merger-related savings for BGE.

"While I do not have an alternative quantification of a reasonable result for BGE, these concerns raise questions about the adequacy of the applicants' rate credit offer since it is supported by the BGE allocation result," Kahel wrote in his testimony.

In considering the size of the credit, Kahel said, the commission should take into account the "risks to utility customers associated with the proposed merger and the proportionality between shareholder and customer benefits."

Kahel noted that Exelon shareholders have seen their stock price increase since the merger announcement and that Constellation stockholders would see their dividends double under the deal.

The People's Counsel, which represents consumers on utility matters, hired consultants to examine the deal's likely impact on BGE ratepayers.

On behalf of the People's Counsel, Hugh Larkin Jr. recommended in his testimony that BGE be prohibited form filing a request for a gas or electricity rate increase for three years to ensure that all cost savings have been reflected on the utility's books. The consultant said the companies should be required to track all cost savings that are directly applicable to BGE and credit them to the utility.

Witnesses for the state and the People's Counsel also raised concerns over the management of BGE after it became part of the larger, merged company. They said the deal would mean that BGE would compete with Exelon's other two utilities for corporate resources.

Nancy Brockway, a former New Hampshire utility commissioner consulting for the People's Counsel, said in her testimony that the merger would diminish the ability of the Public Service Commission to regulate BGE and protect customers from unreasonable rates, inadequate service or insufficient reliability.

Under Exelon, Brockway said, BGE would be a small part of the larger organization, and the company would focus primarily on the larger, unregulated business — a phenomenon known as the 'remoteness' of management.

While BGE was the only part of Constellation's business that was profitable in 2010, Exelon's two regulated utilities represented only a quarter of its profit last year.

If the merger had taken place last year, Brockway wrote, BGE would have represented only 5 percent of Exelon's profits.

Brockway offered a solution to ease the competition for resources, suggesting that Constellation and Exelon establish a $68 million fund to bring BGE up to Exelon's reliability goals without raising rates.

That amount, according to Brockway, is how much BGE has estimated in other filings that it would need to spend to improve reliability by 30 percent over five years.

Exelon and Constellation officials have said the deal would be "net jobs positive" for Maryland after counting the hundreds of jobs that Exelon says it would move to Maryland and the new positions created in the construction or renovation of a "green" building for a new Baltimore headquarters. The companies have promised that no BGE workers would be laid off for at least two years after the merger is completed.

But critics expect corporate layoffs eventually and say the construction jobs would be temporary.

"In fact," Maryland Energy Administrator Malcolm Woolf wrote, "Exelon has acknowledged that but for the temporary jobs associated with the building construction, the merger would actually be net jobs negative for Maryland due to the loss of CEG corporate jobs from retirements, layoffs or relocations to Chicago or other areas outside of Maryland."

Richard L. Carlson, a consultant for the Public Service Commission, wrote that it is unclear whether the proposed merger would benefit or harm ratepayers and the state because the potential increase of wholesale energy prices has not been determined and there has been no realistic projection on job creation or loss.

He suggested that the companies commit to a minimum budget for construction of a new headquarters and refund ratepayers if they do not meet that minimum; shield ratepayers from any increases if the project costs per employee are higher in the new building; use accounting rules to ensure that payments for low-income energy assistance are not included as a cost to BGE customers; and transfer the $10 million intended for electric vehicles to the state's EmPower program to support overall energy efficiency goals.

Carlson pointed out that the companies' proposed $4 million contribution to state energy-efficiency programs does not represent a new investment of cash. Instead, the company has promised not to pass on this cost to ratepayers.