Constellation and FPL give up on merger, weakening lawmakers' leverage on rates

Merger Unplugged

October 26, 2006|By Paul Adams | Paul Adams,Sun reporter

Constellation Energy Group Inc. and Florida's FPL Group Inc. officially gave up on their merger plans yesterday after executives concluded the deal was hopelessly mired in a populist political debate in Maryland over deregulation and rising electricity rates.

The move means control over Constellation and its BGE utility will remain in local hands, rather than shifting to Florida. But it weakens the hand of lawmakers and regulators, who were expecting to use the merger's approval as leverage to extract more concessions to offset a 72 percent BGE rate increase.

Constellation asked to pull out of the $12.4 billion deal and FPL agreed, ending weeks of speculation that the end was near. The companies had suspended integration activities in May, and two weeks ago FPL Chief Executive Lewis Hay III made it clear in a conversation with analysts that his patience was wearing thin.

Hay had said he would assess the deal's prospects after the governor's election, but the two companies concluded that the outcome probably would not have made any difference in regulatory treatment of the deal.

"Honestly, I don't have any hard feelings," said Mayo A. Shattuck III, Constellation's chief executive officer, in an interview yesterday. "This is business, this is politics, and it's a tough business. It's hard to understand and has a lot of moving parts well beyond what's going on here in Maryland."

The merger would have created a Fortune 100 company with an estimated $28 billion in annual revenue and operations stretching from Maine to California. It would have been the largest seller of wholesale power to large industrial users, municipalities and utilities in markets where competition is allowed.

But the utilities agreed to their deal just months before electricity rate caps were about to come off at BGE as part of the transition to a deregulated market. Citing soaring energy costs, BGE announced a 72 percent rate increase, which was approved by the PSC without hearings. Outraged legislators later passed a law temporarily lowering the increase and firing the PSC, which had authority to rule on the merger.

A panel of judges overturned the commission firings in September but left in place a portion of the law preventing the sitting members from ruling on the Constellation-FPL deal. FPL challenged that part of the ruling in Baltimore City Circuit Court this month. But company executives concluded that even a favorable legal outcome wouldn't keep the legislature from moving next year to extract more concessions for consumers or otherwise intervene in the merger.

"We kept seeking to understand what paths there might be to get the transaction done, and we felt that time was a bit of an enemy here," Shattuck said.

The merger's demise was hailed by consumer advocates, who feared it would hand ownership of a majority of Maryland's power plants to an out-of-state company. They also noted widespread public opposition, which in recent months inspired protests outside PSC headquarters and led some rogue BGE customers to harass line workers.

"This deal would have created an energy giant large and powerful enough to dictate electric rates with the potential to cost every ratepayer in the state hundreds of dollars more a year," said Johanna Neumann, policy advocate for the Maryland Public Interest Research Group.

With no deal, however, customers will not get $214 million worth of merger-related rate concessions pledged by Constellation in hopes of winning regulatory approval. Also in peril are $386 million worth of companion rate cuts negotiated into the June legislation, which Constellation has said in regulatory filings could be vulnerable to a court challenge.

Shattuck said yesterday that the company hopes to include the givebacks in a broader negotiation with lawmakers over the future structure of Maryland's energy industry and other actions aimed at reducing rates.

"We feel like we have a valid constitutional argument about those takings," he said, referring to the $386 million. "At the same time, in all likelihood it's going to be a perfect opportunity for us to talk to the [legislative] leadership about how to pull a lot of these issues together into one place and perhaps ... solve several of these issues in one settlement."

Analysts say Constellation will remain a strong stand-alone company, though one with slower growth prospects and reduced chances of finding another partner willing to take a chance on the Maryland market in the near term. Constellation, which needs large amounts of financing for its power trading activities, was attracted to FPL for the steady cash flow of its Florida Power & Light unit.

"I don't know who would want to go in there now, to be honest with you," said Michael Worms, an analyst with BMO Capital Markets in New York. "I think it will be awhile."

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