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State should pull plug on Constellation-Exelon deal

On Feb. 21, 1997, an employee improperly shut down and then restarted a reactor at the Zion Station nuclear power plant in Illinois, badly damaging the steam generators.

It was a costly, embarrassing mistake, but everybody expected owner Commonwealth Edison to reopen the facility. The repair estimate was far less than the many billions it would take to build a new nuclear generator.

But ComEd and parent Exelon Corp. decided to let the plant collect dust, even though it had decades of useful life left. Last year, Exelon began the process of dismantling and decommissioning Zion Station. It'll be gone within a few years.

Why, in a world that needs all the cheap, carbon-free nuclear energy it can get, did Exelon put its own facility out of business?

Maryland regulators should ponder the answer as they convene hearings this month on Exelon's proposal to buy Constellation Energy and Baltimore Gas and Electric: Exelon shut down Zion Station, knowledgeable people believe, to create scarcity in the electricity market and to drive up the prices it was able to charge at its remaining Illinois generation plants.

Exelon denies this. But allegations about the Zion closure fit a troubling pattern of behavior that should make the Maryland Public Service Commission reject Exelon's takeover attempt in the absence of extraordinary benefits and assurances for the state and consumers.

Do we really want BGE and Constellation to be owned by a company that:

• Mothballed Zion Station just as deregulation was giving power companies the ability to inflate electricity prices by withholding megawatts from the grid?

• Agreed in 2007 to consumer rebates of $800 million to settle allegations that it manipulated a wholesale electricity auction, charged unjustified price markups and accomplished a "massive transfer of money from ComEd's captive customers to the stockholders of Exelon Corp.," according to the Illinois attorney general?

• Financed a fake consumer group called Citizens Organized for Reliable Energy that lobbied for higher electricity prices? ComEd admitted it was behind the group after news reports and complaints filed with regulators forced it to come clean.

• Could dominate the regional electricity supply even more than Constellation, which took over the former BGE plants? A report filed three weeks ago by the independent market monitor for the Mid-Atlantic grid found that an Exelon-Constellation marriage "would significantly increase concentration" of generator ownership and potentially give the companies the ability to drive up electricity prices.

Years ago, Enron became notorious for temporarily shutting down generators to decrease the supply and raise the price of electricity on the deregulated grid. Exelon and ComEd's permanent closure of Zion Station, according to the companies' critics, is the Enron gambit on a breathtaking scale.

David Hollein was a nuclear engineer with Westinghouse, which built Zion Station. He worked closely with ComEd for years when Zion was generating megawatts for the Chicago area.

"There is obviously no technical reason why these plants can't restart," Hollein said in an interview about Zion's twin reactors. Exelon, he added, "decided to pull this off the grid so they can say, 'Oh, our cost of generating electricity is high because we have these other plants that are less efficient' — so they can keep prices up. If you put a nuclear plant on, it decreases prices immediately."

Exelon closed Zion for "economic reasons," said company spokeswoman Krista Lopykinski. The plant's operating license would expire in 2013, and Exelon wasn't sure it could get a renewal, she said. "At that time, the investment in Zion" required for a restart "was greater than the investments needed for ComEd's other plants," she said.

Repairing Zion would have cost $2 billion, she said. In 1997, however, ComEd told the Chicago Tribune that it would have cost $415 million. Whatever the case, a new facility that size would cost much more — in the $10 billion neighborhood.

"They could have renewed the license," Hollein said. "There's nothing wrong with the plant. By normal maintenance, you could keep these plants running for 100 years."

Another nuclear engineer close to Exelon made a similar argument last year. James Hopf works for Energy Solutions, the contractor Exelon hired to decommission Zion Station.

Any notion that the plant was obsolete is "ridiculous," Hopf posted on Atomic Insights, a website aimed at nuclear power pros. But keeping Zion Station open, he said, "would push down the market price for power in the region," thus cutting Exelon's profits.

In Illinois' deregulated market, Hopf explained, Exelon makes out best when its mix of nuclear- and gas-fired generation is just right. That, he said, "results in Exelon making a huge profit on its remaining nuclear generation."

He added: "Thus it could be said that [reopening] the plant was 'uneconomical.' For Exelon, that is. The ratepayers would have saved money, but hey, they're not the ones making the decision."

Energy Solutions declined to comment other than to confirm that Hopf is an employee. Hopf — whose comments were included in recent objections to the merger filed with federal regulators by the Maryland Office of People's Counsel — did not reply to messages left on his voice mail.

At least Illinois got rid of the wholesale power auctions that state Attorney General Lisa Madigan said were being manipulated by Exelon. Exelon was charging ComEd customers three times what it cost to produce the electricity, Madigan found in 2007. In response, the state created an agency to make utilities buy the cheapest electricity available.

In Maryland, however, utilities such as BGE still buy power through Illinois-style auctions.

Even according to Constellation and Exelon, an unaltered combination of the two companies would give them too much control of the Mid-Atlantic market to satisfy antitrust authorities.

Through the former BGE plants, including the Calvert Cliffs nuclear station, Constellation controls large amounts of Maryland's generation fleet. For its part, Exelon owns many plants in Pennsylvania and New Jersey, including the Peach Bottom nuclear site a few dozen miles north of Baltimore.

The companies have tried to make antitrust authorities happy by promising to sell three of Constellation's coal-fired plants in Maryland. But some analysts say this would only begin to lessen the combined companies' chokehold on the region.

Depending on the buyer, the sale of the plants might even increase ownership concentration among regional generation facilities, found Joseph Bowring, the independent market monitor who referees the PJM grid. (A possible example would be if the plants were bought by GenOn, which already owns generation in the state.)

Stanford University economist Frank Wolak, hired by the Maryland Energy Administration, found that in some cases the Exelon-Constellation deal could increase wholesale electricity prices by 12 percent to 37 percent and, ultimately, raise consumer prices as well.

"Combining two suppliers that own a substantial amount of generation capacity in close proximity to one another can significantly reduce competition," Wolak said in his testimony.

Even after the coal plants are sold, the combined Exelon-Constellation could be well placed to manipulate the market and raise prices, found Richard S. Hahn, an energy consultant hired by the Maryland Office of People's Counsel, which advocates for residential ratepayers. Hahn has proposed a complex plan to force the sale of four more plants, owned by Exelon in Pennsylvania, to dilute the power of the combined company.

Here's a better, simpler plan that would make life easier for everybody and be safer for Maryland electricity customers: Pull the plug on the deal.

jay.hancock@baltsun.com

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