That Constellation deal is far from done

November 29, 2008|By Jay Hancock | Jay Hancock,

Warren Buffett has agreed to pay $4.7 billion for Baltimore's Constellation Energy Group.

He'll have to put up much more if he really wants it. To Constellation shareholders? Sure, that's possible. But also to customers of Baltimore Gas & Electric, Baltimore charities and probably a few others. And even that might not be enough.

At stake is the fate of Baltimore's only Fortune 500 corporate headquarters and the electric and gas infrastructure that powers metro Baltimore's economy.

Two weeks ago the Maryland Public Service Commission made it astonishingly clear that it will look at every potential reason to reject or substantially alter Buffett's deal.

He already faces the chance that Constellation shareholders will turn down his offer of $26.50 per share when they vote Dec. 23. Even if they say "yes," however, Maryland regulators are starting to look like an even bigger hurdle.

Not only will the commission consider the interests of BGE customers, as usual. It'll also weigh whether the sale of BGE parent Constellation to Buffett's MidAmerican Energy Holdings benefits metro Baltimore generally. It'll check the impact on Constellation employees. It'll look at the effect on the wider electric grid.

It'll launch "a thorough investigation that errs on the side of inclusion," as stated in its recent filing that describes how it plans to examine the deal.

No mention of what happens to the pigeons on BGE's wires, but I might have missed something.

Even normally the commission is a tough sell, along with the Maryland legislature standing behind it. Twice before they switched off Constellation merger deals.

The first was in 1997, when Constellation and Potomac Electric Power Co. canceled a marriage after the PSC insisted they pass along most merger savings to customers. The second was two years ago, when Constellation and FPL Group called it quits amid legislative attacks on the PSC and anger over soaring electricity prices.

This commission, appointed primarily by Democratic Gov. Martin O'Malley to compensate for what was perceived as a pro-industry slant under former Republican Gov. Robert L. Ehrlich Jr., looks more activist than its predecessors.

And Buffett has offered nothing to placate it.

MidAmerican has agreed to delay a measly BGE rate increase, continue giving a few million a year to local charity, finance capital upgrades and not lay anybody off at BGE.

The promise about BGE is meaningless. They can't downsize BGE because there is no overlap with MidAmerican's utility, which is in Iowa.

So the company is basically offering status quo - minus all the potential layoffs at Constellation's trading operations, unregulated energy divisions and other non-BGE units. That's how they'll likely cut costs in the merger.

For starters, the commission will probably require a customer rebate of at least $200 million over several years. That might have been enough to get the deal done a few years ago. Not now.

This commission is thinking so big that it might hold the buyout hostage until MidAmerican agrees to re-regulate Calvert Cliffs and BGE's other former generation plants.

Deregulation allowed Constellation to transfer the plants, powered by low-cost coal and uranium and bought and paid for by BGE ratepayers, to an unregulated affiliate. It now charges what the market will bear and passes the profits on to shareholders. BGE, meanwhile, must shop for megawatts on the open market, which has driven residential prices higher than they would have been.

The commission might try to force Buffett "to return the former BGE generating plants to BGE and/or to cost of service regulation," instead of letting the plants continue to sell to the highest bidder, it said in its filing.

And that's not all.

It might set itself up as auctioneer, considering Buffett's deal along with any other "concrete and viable alternative transaction" that might land on the table. That could spur a bidding war benefiting BGE customers as well as Constellation shareholders. Electricite de France, which owns almost a tenth of Constellation's stock and made an unsuccessful offer of $35 a share to buy the whole company, might yet spoil Buffett's bid.

The PSC will also probably account for potential decreases in charitable contributions and local investment if Constellation's headquarters were moved to Iowa. And it'll certainly consider the effect of merger-related layoffs, which will be especially painful in an economic downturn.

On the other hand, Buffett and MidAmerican hold the trump card of this financial crisis - billions in cash and lending commitments. A few weeks ago, they were the only thing standing between Constellation and bankruptcy after the company's large liabilities made it vulnerable to the global credit blowup.

After the PSC announced its broad review of the deal earlier this month, a MidAmerican spokeswoman said the company believes the merger is in the public's interest. And a MidAmerican executive told the state Senate Finance Committee last month that he was willing to discuss regulating new generation and transmission assets once the deal is done.

When push comes to shove, Buffett might still be better than the alternatives.

But there are three weeks before the shareholder vote and probably many more before the PSC rules. In an investigation that "errs on the side of inclusion," months will drag on, and results could be very different from the ones foreshadowed in Constellation's news releases.

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