Bloomberg News

Utilities Squeezed as States Tie Mergers to Clean Power

December 28, 2011

(Updates with Feb. 17 date for Maryland regulatory decision in ninth paragraph.)

Dec. 16 (Bloomberg) -- The surging pace of power-industry consolidation, with more than $31 billion in transactions pending in the U.S., is giving state officials such as Maryland Governor Martin O’Malley leverage to wrest more clean-energy investments from merging companies.

Exelon Corp. said yesterday it will invest $1 billion in Maryland, almost doubling its previous offer, to gain O’Malley’s support for the company’s $8.05 billion takeover of Baltimore- based Constellation Energy Group Inc. Chicago-based Exelon agreed to develop as much as 180 megawatts of new electric generation from wind, solar and poultry litter, more than seven times its initial pledge of a 25-megawatt project.

“Five years ago, you wouldn’t have seen a renewable commitment as the core element of a merger settlement,” said Howard Learner, executive director of the Environmental Law and Policy Center in Chicago. “That reflects the renewed importance that governors and states are putting on renewable development: it’s good for the environment and jobs.”

O’Malley had presented the greatest obstacle to the merger with his demands for a slate of sweeteners from Exelon. His sign-off now clears the way for state regulators to approve the deal. Regulators in New York, where the company also supplies power, voted yesterday to allow the merger to proceed.

The governor’s success in gaining the additional investment for Maryland may encourage other state officials to turn to industry to boost clean energy at a time when federal funding is constrained, Learner said.

Northeast Utilities

Similar discussions are under way in Massachusetts, where Governor Deval Patrick’s administration is in talks with Boston- based Nstar and Northeast Utilities over how their combined companies would help meet the state’s renewable energy goals. Northeast Utilities, which is based in Springfield, Massachusetts, and run from Hartford, Connecticut, is in the process of buying Boston-based Nstar.

Tying state approval for mergers to investments in wind and solar may raise costs for utilities and drive more spending on renewable energy at a time when projects are faltering because of falling fuel prices, Paul Patterson, a New York-based analyst with Glenrock Associates, said in a telephone interview.

“You need a tremendous amount of government support, one way or another,” Patterson said. “Renewables are politically very popular. It’s just an example of trying to effectuate policy through regulatory approval.”

Decision Delayed

The Maryland Public Service Commission today delayed a decision date on the merger to Feb. 17 from Jan. 5, allowing time for three public hearings, Regina Davis, a commission spokeswoman, said in an interview.

Environmental groups led by the Sierra Club “support the principle of the settlement” although further review is needed before approval, attorney Joshua Berman said yesterday in a filing.

Exelon’s agreement to build 125 megawatts of wind power will more than double Maryland’s land-based wind generation, O’Malley said in a statement yesterday. One megawatt of electricity is enough to power 800 homes, according to the U.S. Energy Information Administration.

Exelon also agreed to help develop at least 30 megawatts of solar power in Baltimore, and build the first plant in Maryland to turn chicken litter, a bedding material commonly made from woodshavings or straw, into a fuel source.

“This deal represents an unprecedented commitment on Exelon’s part to become part of Maryland’s future,” O’Malley said.

Lower Gas Prices

State officials and regulators have traditionally used their approval authority for utility mergers to protect the interests of consumers, often demanding concessions such as lower electrical rates or customer rebates.

As natural gas prices have fallen amid a U.S. production glut, renewable energy has become a more expensive option. Many projects aren’t commercially feasible without government incentives, so companies may need to be forced to invest, Sam Brothwell, senior utilities analyst with Bloomberg Industries, said in an interview.

When considering whether a utility merger is in consumers’ best interests, it’s appropriate for states to add renewable energy to the mix of considerations that include electric rates and reliability, said Maryland State Senator James Rosapepe, a Democrat.

“The issue in Maryland is that the merger can only be approved if it’s in the public interest,” he said.

O’Malley’s Role

O’Malley, who squelched a previous Constellation merger, brokered the agreement with Exelon executives who had scuttled three previous transactions rather than agree to costly demands by regulators.

In addition to the clean energy investments, the agreement gives Maryland’s utility regulator the authority to order Exelon to sell Baltimore Gas & Electric Co. in the event of a severe nuclear accident at any of Exelon’s reactors, according to a summary provided by the governor’s office. Exelon is the largest owner and operator of U.S. nuclear power plants.

The state also can require Exelon to sell the utility if the company files for bankruptcy protection or allows its credit rating to drop six levels below investment grade, according to the summary.

Federal Regulators

Even with the richer concessions in Maryland, the deal is expected to be economical for Exelon, Dorothea Matthews, utilities analyst for CreditSights Inc., said in a telephone interview.

“Exelon has walked away from other mergers when they’ve said, ‘We’ve made our last concession,’” Matthews said. “I think that helped them here.”

The merger still must pass muster with federal regulators, and is awaiting approval from the U.S. Justice Department, U.S. Nuclear Regulatory Commission and the Federal Energy Regulatory Commission.

The agreement with Maryland, though, “is the last real hurdle,” CreditSights analyst Matthews said.

On Dec. 14, FERC rejected Duke Energy Corp.’s plan for easing competitive concerns associated with its $16.2 billion acquisition of Progress Energy Inc. Duke said yesterday the companies remain committed to the transaction and will submit a new plan to federal regulators soon.

While renewable energy hasn’t proven to be an obstacle to the merger, North Carolina Governor Beverly Eaves Perdue asked the companies last month to purchase power from a proposed wind farm, saying the long-term contracts were “urgently needed” to start the project.

Progress explored the wind purchase earlier this year before deciding against it.

“We have to do what’s in the best interest of our customers,” said Scott Sutton, a spokesman for the Raleigh, North Carolina-based power company, in a telephone interview.

--With assistance from Jim Polson in New York. Editors: Susan Warren, Charles Siler

To contact the reporters on this story: Julie Johnsson in Chicago at jjohnsson@bloomberg.net Bradley Olson in Houston at bradleyolson@bloomberg.net

To contact the editor responsible for this story: Susan Warren at susanwarren@bloomberg.net


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