Exelon-Constellation $7.9 Billion Merger Draws Maryland’s Ire

Maryland Governor Martin O’Malley opposes Exelon Corp.’s proposed $7.9 billion takeover of Constellation Energy Group Inc. and will seek additional concessions from the merging companies, a spokeswoman for the governor said.

The State of Maryland and its Energy Administration, which advises the governor, spelled out their objections and the conditions under which they would support the merger in testimony filed with Maryland regulators yesterday.

The transaction is not in the public interest, and it “poses significant risk of harm” to Maryland consumers, Malcolm Woolf, director of the Energy Administration, testified.

The five-member Maryland Public Service Commission, will hold hearings to review the acquisition and decide whether to approve it by Jan. 5. O’Malley successfully battled two prior merger attempts by Baltimore-based Constellation and is seen as one of the biggest political obstacles to Exelon’s transaction, which was expected to close early next year.

The state’s regulators should deny approval of the merger because it fails to meet statutory standards as currently proposed, Raquel Guillory, an O’Malley spokeswoman, said in an e-mail.

“Exelon and Constellation welcome input from stakeholders as we continue to work toward completing our planned merger,” Judy Rader, an Exelon spokeswoman, said in an e-mailed statement. A Constellation spokesman couldn’t be reached for comment.

More Sweeteners

Maryland officials made clear they expect additional concessions to sweeten the merger, but didn’t list specific demands that would make the deal acceptable.

Among the concerns highlighted in yesterday’s filings: that Baltimore’s utility retains a greater degree of independence than provided by the merger plan, and that its retail electric customers, not just investors, share in the $1.5 billion in cost savings the merger is expected to generate over five years.

The merger will transfer ownership of Constellation’s Baltimore Gas & Electric Co. to a company outside of Maryland that will be overseen by three separate regulatory agencies, Woolf, of the Energy Administration, testified.

O’Malley, a Democrat, rose to statewide prominence as mayor of Baltimore when he squelched a 2006 bid by NextEra Energy Inc. for Constellation amid rising power prices.

“Maryland is going to be the biggest challenge here and they all know that,” Greg Phelps, who manages about $4 billion at Manulife Asset Management U.S. LLC in Boston, including Constellation preferred stock, said at the time the merger was announced in April.

Economic Incentives

Exelon, based in Chicago, met with O’Malley before offering what it said is $250 million in economic incentives to the state, including a $100 rate credit to every customer of Constellation’s Baltimore utility.

Commissioners should carefully weigh the $250-million in merger benefits promised by Exelon against the $1.5 billion in efficiencies the company has told investors it would reap from the deal over five years, Matthew Kahal, an independent consultant hired by the state said in written testimony filed yesterday.

Exelon has promised to pay a $100 credit to each residential customer of Constellation’s Baltimore Gas & Electric Company utility, contribute $9 million to electric conservation programs in the state and invest about $100 million in new Baltimore offices for its operations.

Kahal warned that the consumer benefits might be erased if Exelon raises prices for power flowing from its generation business, which isn’t subject to state rate regulations.

The rate credit provided to consumers should take into account the “extensive and lucrative merger benefits,” Kahal said, and compensate Baltimore Gas & Electric customers for merger risks.

“Even a very slight increase in generation prices due to the merger (e.g. 1 percent or less) would eclipse the $112 million rate credit offered by the Applicants,” Kahal’s written testimony said.

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