Time, politics may doom merger of utilities

October 11, 2006|By Jay Hancock | Jay Hancock,Sun Columnist

Constellation Energy and FPL Group seemed hot to trot.

They announced their merger in December. They wanted to get it done in a year. But then Maryland legislators sacked the Public Service Commission that was supposed to approve it. Then courts reinstated the PSC - but banned it from ruling on the merger. Eleven billion merger dollars are loaded, locked and aimed with no legally constituted Maryland authority to pull the trigger. This is October.

"The merger will be in legal limbo, from which there is no escape" if the present state persists, FPL complained in a lawsuit last week. "The practical effect is that the merger would be denied."

But my guess is the merger is already fading fast. Time and politics are working against it. Behind their apparent impatience for a pairing, the companies show signs of seriously contemplating a breakup.

The companies' reasons to pursue the deal - marrying steady utility cash flow with jumpy trading profits, avoiding failure and building a big national company - haven't changed. But the environment has.

"It's ... not that we don't like the deal, but it's not good for either of our companies and clearly not good for our shareholders for this thing to drag on indefinitely," FPL boss Lew Hay said in a presentation in New York two weeks ago, according to a transcript. "The bottom line is at this point we are taking things day-to-day, trying to see what other new information comes out in Maryland, because it seems like every day something new does come up."

Lest you think this is mere stagecraft, FPL and Constellation suspended most merger preparation last summer. And now Constellation and subsidiary Baltimore Gas and Electric are laying groundwork for a merger-less future.

In June the General Assembly required Constellation to cut $386 million from future (grossly increased) residential electricity bills whether or not the FPL merger goes through. Constellation had previously promised the $386 million plus another $214 million - $600 million total - only if the merger happened. But it didn't lift a finger to oppose making the $386 million savings unconditional.

Now it is questioning the legality of that move, signaling a future legal challenge to reclaim the money if the merger doesn't happen. As reported by The Sun's Paul Adams, in an August filing Constellation, BGE and FPL asserted that "there is substantial uncertainty as to the legal efficacy" of the legislature's mandate for $386 million in savings.

If the merger doesn't happen and BGE gets a judge to strike the requirement, consumer credits to ease 72 percent rate shock would disappear. Surviving would be the General Assembly's deferral plan that limited rate increases for the average bill to 15 percent instead of 72 percent for almost a year, with the deferred amount being paid back over time.

Certainly the political entrails are not encouraging for a merger.

Baltimore Mayor Martin O'Malley, who has seized several opportunities to impede the deal and question BGE's right to raise rates 72 percent last July, has vowed to fire the PSC - again! - if he becomes governor. He is the Democratic nominee.

He doesn't seem to have that power; commissioners appointed by previous executives have served out their terms before a new governor replaces them. But in an ironic legal ricochet, the September court ruling prohibiting the legislature from firing the PSC bolsters gubernatorial power over the panel, perhaps giving O'Malley authority to start with a clean PSC slate.

"We'll have to see what happens there, if he really means it or if this is just political rhetoric," Hay said in his talk in New York. "But based on the Court of Appeals ruling, it does look like the executive branch has those powers." Even if it doesn't, a Democratic Assembly will be happy to change the law.

An O'Malley PSC would probably do for the FPL-Constellation merger what the New Jersey Board of Public Utilities just did for Exelon's combination with Public Service Enterprise Group, New Jersey's largest electric and gas utility: scuttle it by demanding big rate rebates. Not that FPL and Constellation would stick around long enough to find out.

A USA Today/Gallup poll out last week showed O'Malley leading Ehrlich 53 percent to 41 percent among likely voters, with a 5 percentage point margin of error.

Even if Ehrlich wins, the merger is jeopardized. With the Ehrlich PSC banned from considering it, litigation or legislation to anoint a replacement authority could take months, even if courts are compliant. Hearings would probably take place in the heart of the 2007 General Assembly session. The legislature, having been rebuked in firing the PSC, will be delighted to throw up new obstacles.

A decade ago, BGE sought to merge with Potomac Electric Power Co. in a $3 billion deal. The companies slogged through two years of hearings, lawsuits and rulings before giving up. Constellation and FPL are not likely to be so patient.

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