Back to the future?

December 21, 2005

Initial accounts of the proposed merger between Baltimore-based Constellation Energy Group Inc. and the FPL Group Inc. of Florida have been fairly glowing. There's the pre-nuptial mewing about an equal marriage of two quality companies (though of course Florida Power & Light will own 60 percent of the joined entity). There's the usual pre-merger chatter about synergies that will be realized and even some tepid assurances about no layoffs. And there's optimism about the joined ventures expanding aggressively in the brave, new unregulated world of energy supplying and trading.

At least some cautions are in order, however, and these are not just restricted to the questionable assertion that somehow Baltimore, already a branch-office town, is not losing its only Fortune 500 headquarters in this deal. The larger concerns stem from the rapidly changing national regulatory environment that is allowing such mergers for the first time in 70 years.

The Constellation-FPL deal could not take place had not Congress last summer quietly repealed the Public Utility Holding Company Act of 1935. That New Deal act followed major securities scandals and market manipulation in the heavily consolidated utility industry of the 1920s; back then, 10 highly leveraged, interstate holding companies controlled three-quarters of the U.S. electric power business, beyond the reach of state regulators. The act protected public utilities' health by regulating holding companies' ability to siphon off their reliable, no-risk revenue streams for much riskier, non-utility business ventures and self-dealing.

Repeal of the PUHCA, effective next year, allows such interstate conglomerates to rise again, with the Constellation-FPL merger only the largest of several such deals already in the works. Some consumer advocates predict that a half dozen entities ultimately will gobble up almost all U.S. utilities, and the acquirers could even include some of the major oil companies or overseas firms. Many doubt that state utility regulators across the country have adequate resources to penetrate the complexities of, say, an ExxonMobil's books in order to protect their utility customers' and region's interests.

In the case of Maryland's utility regulator, the state Public Service Commission, the immediate task will be to approve or reject the Constellation-FPL deal. And so the first question becomes what new state safeguards may be needed to protect the financial stability of the Baltimore Gas and Electric Co. from potential abuses that harken back to the 1920s?

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