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Constellation/Exelon Claim No Adverse Retail Market Impacts from Merger, Offer Additional Mitigation
May 23, 2011
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In addition to previously announced divestitures, Constellation Energy and Exelon have committed to sell 500 MW of baseload energy under contracts that will extend through the end of 2014 as part of seeking approval of their merger at FERC.
The commitment was prompted by "a number of minor screen violations in the [PJM] 5004/5005 submarket" even under the previously announced asset divestitures. The 5004/5005 submarket is essentially the AP South submarket, but excluding the Dominion zone.
The contracts, of one year in length or longer, would be 500 MW per hour, 24/7, with a Point of Delivery anywhere in the 5004/5005 submarket, including the PJM Eastern Hub.
The applicants made the commitment through the end of 2014, because, after that time, Constellation's right to market the non-contracted output of the Constellation Energy Nuclear Group LLC units decreases from an 85% share to a 50.01% share (the remainder marketed by EDF Trading), thereby reducing the applicants' control of capacity in PJM and resolving the screen violations.
Additionally, Constellation and Exelon committed to offer generation assets under price caps in the EMAAC capacity submarket to address a "temporary" market power issue in that submarket. The temporary market power issue is raised in the EMAAC capacity submarket as a consequence of Constellation's tolling agreement for the Delta plant, which expires on May 31, 2017.
To mitigate this issue, the applicants will implement an offer cap that will commence with the consummation of the transaction. Starting at that time, the applicants will offer all their not-previously-committed generation capacity in the EMAAC submarket not subject to a Reliability Must Run agreement, in all PJM capacity auctions covering the periods between the consummation of the transaction and the earlier of May 31, 2017 or the date the Delta toll is terminated or divested, at either a zero price, or at or below the offer cap approved by PJM or the PJM Market Monitor for each resource. The applicants will also bid the Delta plant at a zero price in all such auctions, unless the Delta tolling agreement is sold or terminated effective before any such auctions take place.
As previously reported, Exelon will divest three Constellation plants in PJM totaling 2,648 MW:
- Brandon Shores (Anne Arundel County, Md.): 1,286 MW, primarily coal-fired
- H.A. Wagner (Anne Arundel County, Md.): 963 MW, coal-, natural gas- and oil-fired
- C.P. Crane (Baltimore County, Md.): 399 MW, coal-fired
Constellation and Exelon also presented testimony from Navigant which said that there is no adverse impact on retail competition form the merger. FERC only considers retail market impacts if petitioned to do so by a state regulator.
However, according to the attached testimony, Navigant's review of retail market power issues only examined effects from the elimination of a retail competitor for non-residential customers in the markets where Exelon and Constellation's retail units overlap (most significantly ComEd and PECO).
In a brief four paragraphs related to retail market issues, Navigant said that as, "[n]on-residential retail electric markets are characterized by relative ease of entry ... [t]here is no reason to believe that vibrant retail competition for non-residential electric customers in the ComEd and PECO service territories will be significantly diminished by the proposed merger."
Navigant also said that competitive wholesale markets are a prime prerequisite for having competitive retail markets, and reiterated that its analysis found that the merger will not harm wholesale competition.
However, no mention is made in testimony of several key retail issues, and Navigant's analysis apparently did not consider them. Although, as noted, retail market analysis is not required at FERC unless requested by a state regulator, the applicants rely on Navigant's analysis to extol the combination as having no adverse impact on the retail market. A more detailed analysis would seem to be required before making such proclamations.
Among other things, Navigant's testimony is silent on:
- The impact of the combination on POLR auctions, and resulting POLR rates
- The impact of the potential loss of a wholesale supplier to retail marketers, particularly in specific affiliated service areas or areas where the applicants own large shares of generation. While Navigant does find that wholesale competition is not adversely affected, this analysis mainly considers issues such as economic withholding and market concentration, and not potential detriments to the retail market, such as the potential removal of a significant portion of low cost generation from the wholesale market by the applicants, that they dedicate to their own retail books.
- Any potential retail mass market impacts, where there are in most markets far fewer competitors, and where barriers to entry are arguably higher (due to higher costs to acquire and serve). Although Exelon does not have an active mass market book (unless POLR sales are included), and there is no loss of a retail competitor, the further vertical integration of additional generation with Constellation's mass market load raises potential predatory pricing concerns.
This is not to say the merger would result in any of the above issues, but rather that Navigant apparently did not address these questions.
Navigant does say that Exelon and Constellation do not have dominant control over generation sites, and reported that there has been "substantial" new generation entry into PJM. Navigant cited PJM's 2010 State of the Markets report for this conclusion, which listed more than 20,000 MW of new capacity over the past decade. Neither Navigant nor the report listed what amount of these additions represented new build, as opposed to uprates by existing competitors, which is an especially important distinction in evaluating the recent capacity additions (listed as over 2,000 MW in each year from 2008-2010).
In the merger application, the applicants reported that retail supplier Exelon Energy has approximately 17,000 electricity accounts in Illinois and Pennsylvania and approximately 11,000 natural gas accounts in Ohio, Illinois, Michigan, Kentucky, and Pennsylvania.
Constellation NewEnergy and its subsidiaries were described as serving more than 100,000 customers in 43 states, the District of Columbia, and Canada. Constellation also reported managing 1,600 MW of demand response. To date, Constellation said that it has invested approximately $90 million in its demand response business.
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