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Md. PSC Staff Analysis Shows Benefits from Constellation-Exelon Merger Potentially Negated by Even Small Impact from Market Power
September 19, 2011
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The proposed merger of Exelon and Constellation Energy is, as filed, not consistent with the public interest, Maryland PSC Staff said in testimony to the PSC (9271), with Staff's analysis incomplete due to a later deadline for filing testimony relating to market power issues.
Among the major intervenors in the case (Staff, Maryland Energy Administration, Office of People's Counsel), none addressed the structure or procurement of Baltimore Gas & Electric SOS, or long-term generation contracting, in their testimony (though MEA does propose an in-state renewable obligation on all Exelon sales, implicitly including SOS sales by BGE, as discussed below).
As market power will not be addressed until Staff testimony to be filed on September 23, 2011, Staff's analysis, including a cost-benefit analysis, was not complete. However, even without considering any potential market power impacts, Staff said that Constellation and Exelon have failed to meet the requirement that the merger be consistent with the public interest, convenience, and necessity, including benefits and no harm to consumers. However, with several conditions, Staff said tat the merger could potentially meet the statutory requirement, contingent on the findings of the Staff market power analysis.
While Staff could not yet opine on any market power impacts from the merger, Staff did state that, under its cost-benefit analysis which takes into account all other claimed benefits of the merger, "[a] rise in generation costs due to market power effects of 1.5% to 2.0% would offset the net benefits identified in the [cost-benefit] analysis."
Although it did not present its own analysis, RG Steel Sparrows Point submitted testimony in which it said that, "the merger has the potential for financial harm associated with inflated prices in the PJM wholesale market."
RG Steel Sparrows Point cited PJM's independent market monitor's initial filing at FERC in which the IMM said that Exelon's proposed divestiture of three generating plants in PJM was insufficient to alleviate market power concerns. Although the IMM corrected some of its data inputs, it has affirmed its initial concerns (see related story
RG Steel Sparrows Point said that the PSC, "need not, and should not, close its eyes to the potential that the combined entity could be in a position to manipulate wholesale market prices."
Constellation and Exelon have proposed, as a condition of the merger, to develop or assist in the development, through any Exelon company other than BGE, of at least 25 MW of new Tier 1 renewable energy projects in Maryland.
The State of Maryland and Maryland Energy Administration said that this commitment is too small given the size of Exelon's RPS obligation in Maryland.
The State and MEA proposed that Exelon commit to meeting 25% of its 2022 Maryland RPS obligations through Maryland-based Tier 1 renewable energy projects directly developed by Exelon or developed through the assistance of Exelon over the ten-year period following consummation of the merger.
MEA estimated that by 2022, in order to meet its Maryland RPS requirements, Exelon will have to obtain the equivalent of approximately 3.8 to 5 million non-solar Tier 1 RECs. This estimate implicitly includes BGE SOS sales plus competitive retail sales by Exelon, and assumes that the post-merger Exelon will sell between 30% and 40% of all the energy in the Maryland market by 2022.
To meet the MEA's proposed 25% carve-out for in-state Tier 1 RECs, Exelon would be required to develop resources in Maryland capable of producing 950,000 and 1,250,000 Tier 1 RECs, or an average of 1,100,000 RECs.
MEA noted several potential capacity combinations which could meet this average requirement, including a combination of land-based wind and biomass in the amount of 375 MW, or 420 MW of land-based wind only.
MEA did not discuss the mechanics of its proposed in-state REC commitment, particularly for BGE SOS sales. Currently, SOS suppliers are generally responsible for complying with RPS goals for SOS sales, though, on occasion (such as due to a statutory change in the middle of an SOS delivery year), this obligation has not fallen on the SOS supplier.
Though MEA did not address how the RECs required to be developed by Exelon under its proposal would be applied to SOS sales, this could be done a number of ways, including mechanisms that otherwise maintain the RPS obligation of the SOS supplier, adjusted downward for any Exelon-produced RECs, or mechanisms that remove the RPS responsibility from the full requirements supplier in favor of BGE managing an RPS compliance portfolio. Additionally, to the extent Exelon-developed RECs are used by BGE, MEA did not address at what cost, if any, BGE would assume such RECs.
Similar to Staff, the State and MEA said that the Commission should not approve the Applicants' proposed merger as currently structured, though with conditions proposed by the State and MEA, along with the resolution of other additional issues, applicants could meet the statutory standard.
Most notable among these conditions is that MEA proposed that the PSC shall condition the merger on Exelon agreeing to, "limit future acquisitions unrelated to BGE's utility service, which could be done based on a comparison with some percentage of BGE's assets or total corporate family system assets."
The Office of People's Counsel also testified that, on the current record, the Commission cannot reasonably apply the statutory standard of benefits and no harm since post-merger decisions regarding how BGE will operate, how its capital is to be allocated, and how it will be governed internally have not been answered by Exelon.
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