Energy merger would benefit Maryland

October 11, 2006|By Anirban Basu

State lawmakers concerned about protecting consumers should be supporting, rather than impeding, the proposed merger of Constellation Energy Group with Florida's FPL Group.

Faced with significant electricity rate increases this year, legislators worked with local utilities to fashion a phase-in plan that provides lower initial rate increases for customers of Baltimore Gas and Electric, Pepco and Delmarva Power.

Though that solution wasn't perfect, it provides a fair amount of relief and time to Maryland's consumers, who have had to deal with substantial price increases in recent years, including from housing, property taxes, health care, groceries and gasoline. These same consumers have been seduced by low interest rates in recent years, prompting them to take on substantial amounts of debt related to mortgages, autos and consumer electronics. Hitting them with a 72 percent electricity price increase during a period of fragile household finances would have sown great unhappiness, and the legislature was rightly concerned.

That's why the General Assembly's attitude toward the proposed merger of Constellation and FPL is so puzzling. If a goal of public policy is to provide rate relief to consumers, what better way to accomplish this than to generate hundreds of millions of dollars in operational efficiency? Gross estimated savings from 13 proposed mergers of major utilities across the nation averaged more than $1 billion and ranged from $400 million to $2.2 billion.

A Constellation-FPL merger would unleash similar operational efficiencies. Leaders from the two companies are so confident of post-merger productivity enhancements that Constellation has offered $600 million in credits over 10 years to BGE customers. Can Maryland's legislature simply turn its back on more than half a billion dollars? Is this consistent with earlier efforts to restrain rate increases? The answer is obvious.

But that's not where the issue ends. In a recent study authored by Sage Policy Group, we concluded that the $600 million in credits represents only the first set of benefits to Maryland's consumers. That's because the operational efficiencies unleashed by the proposed merger are far more meaningful in the context of deregulation and competitive markets. Thus far, residential customers in Central Maryland have not benefited from the emergence of competitive bidding for electricity in the way that institutional customers have. This is not altogether surprising, because the freezing of BGE's rates from 1999 until July represented a major barrier to other suppliers entering Central Maryland's residential market.

With the lifting of rate caps this summer, these barriers began to disappear. Competition for Central Maryland residential customers has emerged, and as rate increases are phased in, additional entrants into the market are likely.

That's what makes the proposed merger so intriguing. The post-merger Constellation would be the nation's leader in electricity generation capacity, in capacity derived from wind, and in supplying electrical energy to wholesale markets. It would also be second in the number of regulated energy power customers and third in U.S. electrical generating capacity derived from nuclear energy.

In short, the Constellation-FPL combination would create an energy marketing and supply behemoth positioned to provide energy to Maryland's customers as efficiently as possible, given available technologies. Constellation would provide energy more efficiently because of improved operations and because the post-merger entity would be a highly effective and potent bidder for electricity, capable of supplying Central Maryland in a way that a smaller utility could not.

There is also potential for Baltimore to gain headquarters jobs through the merger. The combined company's post-merger expansion would be disproportionately driven by its merchant energy operations, which will remain in downtown Baltimore. The post-merger entity would be in a better position to expand because of enhanced purchasing power, financial stability and market share.

If we play our cards right as a community, Baltimore could come out of this process as a leading corporate center in the emerging merchant energy marketplace. Given the lack of corporate headquarters in downtown Baltimore, one would think that policymakers would leap at the opportunity to position the city for major corporate expansion and associated prestige and income.

All of this suggests that rather than fighting the merger, legislators should seek to ensure its success and to induce the new corporate entity to locate a greater share of headquarters jobs here rather than in Florida through incentives, good will and other mechanisms. In the final analysis, constructive engagement with the merged entity will improve conditions for Maryland's residential consumers and its business base.

Anirban Basu is an economist and chairman and CEO of Sage Policy Group in Baltimore. His e-mail is abasu@sagepolicy.com.

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