September 25, 2011|Jay Hancock
It wouldn't be an O'Malley governorship if the state didn't take a few swipes at Constellation Energy boss Mayo Shattuck as it prepares to challenge the company's proposed takeover by Exelon Corp.
Shattuck and O'Malley have a long history of friction. True to form, Gov. Martin O'Malley's lawyer recently aimed several pointed questions at Christopher Crane, Exelon's president, about how Shattuck negotiated the deal, whether quid pro quos were offered, and what Shattuck's role would be at the merged company.
I'll get to those in a minute. It would be dangerous, however, if the merger hearings starting next month end up being all about Shattuck, green energy and electricity prices — the O'Malley administration's other interests. Recent catastrophes remind us that the most important thing to focus on is protecting Constellation subsidiary Baltimore Gas and Electric from the worst-case scenario.
Imagine it's 2015. Chicago-based Exelon is running BGE, and a rare earthquake knocks out Exelon's Limerick, Pa., nuclear plant and damages other Exelon plants in Pennsylvania and New Jersey. Exelon's insurers prove unreliable, there's a run on Exelon debt, and the company prepares for a bankruptcy filing.
As I said, worst-case scenario. The chances of earthquake core damage to the Limerick plant are one in 18,868 per year, according to the Nuclear Regulatory Commission. But few people expected the catastrophic meltdowns in Japan this year or the financial crisis of 2008, either.
What would prevent Exelon from raiding BGE for cash, putting Baltimore's power supply at risk and seeking big BGE rate increases to pay off creditors? It's the Public Service Commission's job to think about such things.
If Exelon owns Constellation, the people ultimately responsible for BGE will be four states and a corporate labyrinth away. Until recently, such arrangements were illegal. Congress banned them after industrialist Samuel Insull built what might be described as the Enron of the 1930s out of Illinois' Commonwealth Edison.
The ruin of Insull's multistate empire caused huge hardship and inspired the Public Utility Holding Company Act of 1935, which banned cross-state ownership and restricted complicated corporate structures for utilities. After it recovered from Insull's insults, Commonwealth Edison grew into today's Exelon.
Enron offers another warning about absentee landlords. Enron was able to buy Portland General Electric of Oregon in 1997 — before the ownership restrictions were relaxed — because the Enron holding company was incorporated in Oregon even though the home office was in Texas. Enron's implosion led to years of uncertainty for PGE and didn't turn out to be disastrous for the utility only because state regulators had built good defenses.
In 2005, Congress effectively repealed the Depression-era laws. Now it's up to the PSC to make sure the ramparts around BGE are even sturdier.
The commission has already added some protection. A couple of years ago, it required an extra corporate layer between BGE and a holding company; restrictions on BGE's ability to file for bankruptcy; restrictions on a bankruptcy judge's ability to pool BGE's assets with those of an owner; and restrictions on BGE's ability to pay dividends to a corporate owner.
But that might not be enough.
The proposed Exelon buyout "changes BGE's corporate family in ways that increase the probability of harming … BGE's ability to carry out its public service obligations," lawyer and energy expert Scott Hempling testified before the commission on behalf of the Maryland Energy Administration.
In short, Hempling said, BGE would be a little fish in a big Exelon lake that nobody can guarantee will stay calm. The PSC could consider blocking the merger, he said, or it could allow it but retain the power to make Exelon spin BGE off as an independent company if necessary.
Exelon's future, he testified, "is unknown, unbounded by Maryland's public interest and largely outside the commission's control, permanently."
It's been a rough ride for BGE even with Constellation's in-state ownership. In 2008, under Shattuck's leadership, risky market bets nearly drove Constellation into bankruptcy. Maybe that's why another lawyer representing the state grilled Exelon's president, Crane, about how Exelon CEO John Rowe decided that Shattuck would be executive chairman of the combined company.
"Would it be correct … that Mr. Rowe was not all that thrilled" to make Shattuck executive chairman of the board with no day-to-day duties, state lawyer Scott H. Strauss asked Crane.
He added: "Have you and Mr. Shattuck discussed in any way a time frame after which he would resign as chairman of the board?"
Rowe was fine with making Shattuck chairman, Crane said. No, they hadn't talked about when Shattuck would leave.
We don't even know yet how much Shattuck would make as chairman of the merged corporation. "No decisions have been made" on Shattuck's post-merger pay, a Constellation spokesman said.
Given the O'Malley administration's history with Shattuck, it's unclear whether state officials are unhappy he's in line for a highly paid sinecure at Exelon. Or whether they're relieved he can't get his hands on day-to-day management.
jay.hancock@baltsun.com
