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Constellation, Exelon say they won’t make big changes to deal

Constellation Energy Group and Exelon Corp. told Maryland regulators Wednesday that they are happy with most of the details of their proposed $7.9 billion merger despite concerns that have been raised.

In testimony filed with the Public Service Commission, the companies refute many of those concerns. Exelon President Christopher Crane, who will be CEO of the combined companies post-merger, said in an affidavit that he disagreed with many of the criticisms.

Also Wednesday, Constellation’s partner in its nuclear energy business — Electricite de France — said it would vote against the acquisition and filed counter-testimony calling for the deal to be dropped.

Leading up to hearings set to begin at the end of the month, expert witnesses for the PSC, the Maryland Energy Administration and the Office of the People’s Counsel all registered concerns with the merger plan as announced. Chief among them are that there needed to be more benefits to Maryland ratepayers and the proposed renewable energy commitment is too small, as are the planned contributions to energy efficiency and low-income rate-relief funds.

The witnesses also highlighted perceived problems with local control of Baltimore Gas & Electric Co. post-merger, and the level of influence the combined company would have on the regional power market.

Constellation and Exelon have said the deal would mean a direct investment in Maryland of more than $250 million. The companies also said the acquisition would create nearly 900 jobs in the state related to projects associated with the deal, such as the development of a new or renovated headquarters building for the new company’s energy marketing and renewable development businesses, as well as the development of a new 25 megawatt renewable energy project. Under the companies’ proposal, residential customers of BGE would each receive a $100 credit.

Crane said in his testimony that the proposed renewable energy project was larger than one included in the merger of FirstEnergy Corp. and Allegheny Energy Inc. that the PSC approved in January. He also said that the calls for higher rate credits and a bigger renewable energy commitment were unfounded, and could in some cases even financially harm the company or put the deal in peril.

“Exelon does not agree that additional direct customer benefits are appropriate,” Crane said in the testimony. “The benefits of this transaction to BGE, its customers, and Maryland are real and significant.”

Raquel Gillory, spokeswoman for Gov. Martin O’Malley, said Wednesday that the administration was still reviewing Exelon’s filing but that initially it appeared to not address concerns raised by the state.

“It really doesn’t come anywhere close to what we wanted to see,” Gillory said. “Our interest is to do what’s best for the consumers, and this doesn’t seem to meet our initial concerns.”

Crane’s testimony also rebutted the idea that BGE’s standing in the merged company would be diminished since it would be the smallest of three regulated utilities Exelon would own.

“In fact, this suggestion makes no sense,” Crane said. “BGE will be a multi-billion dollar portion of our company, with over 1.2 million customers, and will remain the largest gas and electric utility in the State of Maryland. As such, the notion that Exelon will in any way compromise BGE’s service obligations is unjustified.”

Addressing concerns that BGE would be run from out-of-state, Crane said that BGE CEO Kenneth W. DeFontes Jr. would stay on in that position after the merger, and in the new organization would join the CEOs of Exelon’s other two utilities on an executive committee helmed by Crane.

“BGE will remain locally managed, will have the same accountability to the PSC as it currently does, and will have a strong voice at Exelon,” DeFontes said in a news release about the testimony. “As part of Exelon, BGE will continue to provide safe and reliable service to its customers at just and reasonable rates.”

Crane also said in his testimony that concerns about the level of market share the merged company would have on the regional power grid had been addressed. This week, the companies came to an agreement with Joseph Bowring, the PJM Independent Market Monitor, that removed his concerns of market share.

The companies agreed that the planned sale of two coal-burning electric plants in Maryland would be made to a limited number of prospective buyers that do not have significant market shares in the regional power grid, operated by PJM. The company also agreed to a number of behavioral limits on Exelon’s bidding actions in the PJM market.

EDF is Constellation’s second largest stockholder and said Wednesday it would vote against the deal. EDF owned 7.2 percent of Constellation’s shares as of April 15. Not only did the former partner of Constellation say it would vote against the deal, but in a withering affidavit, EDF’s expert witness provided numerous reasons he said the PSC should not approve the deal.

“As the witnesses for the State, Staff and OPC have recognized, the package of alleged benefits or merger commitments identified by the Applicants are extremely limited, ambiguous and do not and cannot overcome the serious downsides to Maryland of the proposed merger,” said Jeffrey W. Johnson, a principal at energy consulting firm JWJ Energy. “In any case, even to the extent they have any substance, the alleged benefits fail to offset the potential harms to Maryland’s energy present and future, a conclusion that precludes a finding that the merger is consistent with the public interest.”

Constellation has been partners with EDF in its Constellation Energy Nuclear Group since 2008 when the French utility paid $4.5 billion for a 49.99 percent stake. Constellation at the time was on the verge of bankruptcy, buffeted by capital concerns and facing acquisition by MidAmerican Energy Holdings Co. The companies had also partnered in working to add a third nuclear reactor at Constellation’s Calvert Cliffs facility in Lusby through UniStar, a 50/50 joint venture.

Constellation pulled out of the nuclear effort citing costs and lack of demand. EDF has continued on with the project and took a shot at Exelon, the country’s largest nuclear operator, for not offering to revive Constellation’s interest in new nuclear.

“If it was truly interested in bringing benefit to Maryland, Exelon could have made a useful contribution by, for example, volunteering to join Calvert Cliffs 3 as a U.S. partner to remove one of the regulatory obstacles to the project,” Johnson said. “Exelon has not done so. When it comes to a project that really counts for Maryland, Exelon has looked the other way.”

Also on Wednesday, Exelon said it has set a date for a shareholder vote on the deal. In a filing with the Securities and Exchange Commission, Exelon said the shareholder vote would take place on Nov. 17, in Chicago. Constellation will also have to name a date for its shareholders to vote on the deal.

The all-stock deal with Chicago-based Exelon was unveiled on April 28 and is expected to close in early 2012.