Court decision complicates Constellation, FPL merger

Public Service Commission members can keep seats, can't vote on pact

September 15, 2006|By Tricia Bishop | Tricia Bishop,Sun reporter

A court decision expected to improve the progress of a $10.8 billion merger between Baltimore's Constellation Energy Group and a Florida utility instead has made it more difficult.

Yesterday, the Maryland Court of Appeals ruled that the legislature could not remove members of the Public Service Commission as a law had ordered this summer. But the court did not address a portion of the legislation that prohibits the sitting commission from taking final action on the merger.

That means the commissioners can keep their jobs, but they can't rule on the merger, according to lawyers who quickly reviewed the opinion yesterday for The Sun. But what it means for the companies is still unclear.

Attorneys for Constellation, the parent company of Baltimore Gas and Electric, and Florida's FPL Group Inc. pored over the 126-page ruling yesterday, trying to make sense of it. "We plan to take the next few days to fully digest it and understand its implications," Constellation spokesman Robert Gould said in a statement. FPL spokesman Steve Stengel issued a similar statement.

Constellation has said it wants the merger to proceed so it can expand its primary business of buying and selling power, which is separate from BGE and the company's main profit driver.

That is also the reason FPL was interested in Constellation. Constellation has said in PSC filings that the merger would benefit BGE customers by providing up to $600 million in related savings over 10 years.

But executives had already backed away from calling the merger necessary to the company's future this summer as the deal became shakier. Credit agencies downgraded Constellation's debt rating, and its stock fell as tensions grew over an expected 72 percent electricity rate increase, jeopardizing the partnership, which was expected to be complete by the end of the year. The stock has since rebounded from its May low of about $51, closing yesterday at $59.95.

PSC members had expected to hold merger hearings in November and make a decision by February.

It may take a legal challenge to move the deal forward, however, said Bill Scherman, a former general counsel to the Federal Energy Regulatory Commission, who now practices in Washington.

The court said in its opinion yesterday that it could not rule on the provision preventing the sitting commission from taking final action on the merger because it wasn't asked to address it. Judges acknowledged in a footnote that there was a conflict between leaving the commission members in place and not allowing them to decide the merger.

"The court seems to be inviting [a legal] challenge," Scherman said.

The law passed by the Democratic-led legislature also stayed the full electricity rate increase as it sought to replace the current commission. Lawmakers said some PSC members were biased toward the Republican governor and responsible for approving the electricity deregulation that led to the price increase.

Gov. Robert L. Ehrlich Jr. vetoed the bill, but it was overturned by the General Assembly.

Commission Chairman Kenneth D. Schisler challenged the legislature's efforts in court. But the judges ruled yesterday that such actions were "an unconstitutional usurpation by the Legislature of an executive power" that belongs to the governor, and therefore "null and void," according to a note accompanying the decision.

If the law had stood, new members would have been appointed to the commission, which also could have delayed the deal, analysts said.

"The new commissioners might have needed some additional time to get up to speed," said Michael S. Worms, an analyst with BMO Capital Markets in New York.

There have been other instances of state commissions being absolved of removing members, said Charles Gray, executive director of the National Association of Regulatory and Utility Commissioners. But he said the scenario in Maryland is unique.

"I don't remember hearing of a situation quite like this, where a matter is pending and no one quite knows the outcome during the interim," Gray said.

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