[BETA] Fortnightly

THE RECENT INCREASE IN MERGER ACTIVITY IN THE energy and telecommunications industries has concerned state regulators for some time. Such concern reveals how the practical or "local" aspects of business deals often clash with broader national issues reviewed by federal authorities in merger cases.

In electric utility mergers, for instance, the Federal Energy Regulatory Commission will address effects on competition, rates and regulation. It will pay close attention to "macro" factors, such as whether industry consolidation or concentration of market power comports with federal goals for electric deregulation and restructuring. %n1%n

By contrast, state regulators examining merger proposals will focus primarily on matters of local concern. %n2%n Regulators try to identify who the merger will benefit or harm, including its effect on the local job market and economic development efforts. They will attempt to identify and allocate merger-related "savings" and maintain quality of service, rather than pay too much concern to the overall goals of electric restructuring. %n3%n However, as does the FERC, state regulators will seek to confirm their ability to maintain ongoing regulatory oversight after the merger.

Mergers and Local Benefits: Mutually Exclusive?

A decision issued last year by the District of Columbia Public Service Commission demonstrates the tension between local concerns and broader industry issues facing state regulators as they review merger proposals. In this case, the commission approved, subject to numerous conditions, the proposed merger of Potomac Electric Power Co., and Baltimore Gas and Electric Co. %n4%n

Under the plan submitted to D.C. regulators, the two utilities would combine to form a new entity, Constellation Energy Corp., which would be headquartered in Annapolis, Md. Proponents of the plan had argued the merger would increase the companies' chances of survival in a competitive market, thereby assuring that consumers could continue to receive their electric service from a locally based company.

The proposed plan included: a 30-month rate freeze; expansion of low-income assistance and economic development programs; improved response to minority-business purchasing efforts; construction of a $90-million building to house District-based operations; and a plan to share with ratepayers about $1.3 billion in merger-related savings over the next 10 years.

The commission rejected the companies' merger proposal based on several concerns. The commission was worried, for instance, that the new company might lose interest in economic development and minority contracting efforts in the city. The PSC also was concerned with the allocation of benefits and risks between Maryland and District of Columbia ratepayers.

It concluded that while the proposal might offer the city a "more efficient, lower cost electric company" it could not approve the merger proposal as is. In addition to a four-year rate cap, the commission ordered a $99.5-million refund to ratepayers and a $94.5-million monthly rate reduction credit on consumers' bills.

The commission instructed the new company to set up a $5-million economic development fund and to adhere to existing commitments made by PEPCO concerning "minority and protected class" procurement practices. The commission also ordered the company to exclude costs associated with BG&E's generating facilities from District base rates and to maintain staffing in the District. Finally,