[BETA] Fortnightly

The Federal Energy Regulatory Commission and the Maryland Public Service Commission have approved the merger of Baltimore Gas and Electric Co. and Potomac Electric Power Co. to form Constellation Energy Corp.

However, the stiff terms for approval (em including mandatory rate cuts (em have prompted the utilities to claim they might abandon the merger.

In mid-April, the FERC found the merger consistent with the public interest, upon an examination of the merger's three-fold effects on competition, rates and state and federal regulation, as required under the FERC's recent merger policy statement in Order No. 592. Docket Nos. EC96-10- 000 and ER96-784-000, April 16, 1997 (F.E.R.C.).

At the state level, however, the Maryland PSC directed the new company to reduce rates by $56 million: a decrease of $44 million for BG&E's Maryland customers and $12 million for PEPCO's Maryland customers. It ordered Constellation's base rates frozen for three years, and required that one-half of any earnings of more than a 11.4-percent return on equity be returned to customers. Case No. 8725, Order No. 73405 (Md.P.S.C.).

The utilities have filed a request for reconsideration of the order. The companies want a review of allocation of merger savings between shareholders and ratepayers, and of how the PSC would treat long-term purchased power contracts.

On the same day, the FERC identified the relevant geographic market as the Pennsylvania-New Jersey-Maryland power pool region. It found a general agreement among the parties that the merger will not have an adverse impact on long-term and short-term wholesale capacity markets.

However, the FERC still questions the possible effects of the merger on retail competition and the wholesale short-term energy market. The FERC's trial staff had argued that the merger would remove competition in retail markets when full retail competition is begun, unless the FERC orders divestiture of generation facilities totaling 5300 MW, or an increase in transmission capacity.

The FERC concluded that while the merger would affect retail competition, jurisdiction over that question would rest with the Maryland and District of Columbia commissions. Constellation would control 100 percent of the market for firm energy and between 80 percent to 88 percent of the market for nonfirm energy should retail access become a reality.

In analyzing whether the merger would affect short-term energy markets, the FERC trial staff used the Herfindahl-Hirschman Index. The staff relied on capacity-based measures, finding all post-merger HHIs rated more than 1,000, which is considered to indicate a "moderately concentrated" market. However, in some cases post-merger HHIs have exceeded 1800, which is considered "highly concentrated." But the FERC found that while the staff's use of a capacity-based analysis was appropriate, it overstated the merger's effect on market concentration. The FERC said the merger raised no significant competitive concerns.

Commissioner Donald F. Santa Jr. noted that the FERC said it would not review the effect of competition on retail markets unless involved state PSCs lacked such authority and asked FERC to do so. However, he noted that "as competition continues the line between retail and wholesale competition blurs."

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