Thoughts on Opposition to the Exelon–Constellation Merger

Thomas A. Firey Oct 7, 2011

Ever since the announcement that Exelon Corp. plans to purchase Baltimore-based Constellation Energy in a $7.9 billion deal, Maryland politicians and pundits have been trying to come up with some reason to block the merger. So far, the offered reasons have ranged from possibly legitimate, to self-contradicting, to personally vindictive, to just plain goofy. I think that range tells us something important about Maryland.

Start with the possibly legitimate. The Sun's Jay Hancock worries that customers of Baltimore Gas & Electric, a subsidiary of Constellation that distributes electricity as a regulated utility in Central Maryland, could suffer higher rates or poorer service if Exelon were to suffer some catastrophe. Writes Hancock,

Imagine it's 2015. Chicago-based Exelon is running BGE, and a rare earthquake knocks out Exelon's Limerick, Pa., nuclear plant and damages other Exelon plants in Pennsylvania and New Jersey. Exelon's insurers prove unreliable, there's a run on Exelon debt, and the company prepares for a bankruptcy filing. What would prevent Exelon from raiding BGE for cash, putting Baltimore's power supply at risk and seeking big BGE rate increases to pay off creditors?

I suppose that's possible. But then, isn't it also possible that BGE customers could suffer if current parent Constellation were to suffer some catastrophe? BGE chief financial officer Carim V. Khouzami says no because of current Maryland regulations. But, Khouzami adds, those same regulations would also apply to Exelon:

Two key provisions of the ring fencing rules in place in Maryland today would prohibit BGE from issuing a dividend if its credit rating is below investment grade, or if it would cause its equity ratio-a critical measure of financial strength-to fall below 48 percent following the payment of the dividend. BGE is also prohibited from commingling its cash with Constellation and, after the merger, Exelon.

Credit Hancock with raising a fair question about the public welfare effects of the proposed merger. State regulators should probe the matter further when they begin reviewing the proposal late this month.

Unfortunately, that can't be said for other offered objections. O'Malley administration officials have demanded that, in exchange for allowing the merger, Exelon ramp up spending on so-called "green energy" projects in Maryland and make various commitments regarding rates and reliability. The problem with this is that "green energy" projects have high costs and poor reliability-and aren't all that environmentally benign, for that matter. (For more on this, see sections 2.3 and 6.3 of this paper.) This O'Malley administration objection seems little more than rote recitation of campaign rhetoric.

Another administration objection seems much more sincere. O'Malley has a long-simmering dislike of Mayo Shattuck III, Constellation's chief executive officer. Shattuck would become executive chairman of the post-merger Exelon, a prospect that apparently deepened O'Malley's dislike, as described by Hancock in his above-discussed column:

Shattuck and O'Malley have a long history of friction. True to form, Gov. Martin O'Malley's lawyer recently aimed several pointed questions at Christopher Crane, Exelon's president, about how Shattuck negotiated the deal, whether quid pro quos were offered, and what Shattuck's role would be at the merged company.

... "Would it be correct ... that Mr. Rowe was not all that thrilled" to make Shattuck executive chairman of the board with no day-to-day duties, state lawyer Scott H. Strauss asked Crane.

He added: "Have you and Mr. Shattuck discussed in any way a time frame after which he would resign as chairman of the board?"

Whatever the cause of the animosity, O'Malley's dislike of Shattuck has no bearing on public welfare. Shattuck may be getting a plum position as part of the merger, but that's the concern of Exelon's shareholders, who will be paying his salary. Maryland government shouldn't be used to pursue a petty and pathetic grudge.

But the O'Malley objections seem like wise public policy compared to those offered by Sun columnist Dan Rodricks.  In a piece that reads like Grampa Simpson's "I hate everything but Matlock" rant, Rodricks attacks the proposed merger because:

  • Enron collapsed,
  • George W. Bush cut income taxes on the rich,
  • unionism is in decline,
  • middle-class income has stagnated,
  • the housing bubble popped,
  • Mr. Potter, in It's a Wonderful Life, was a bad guy, and
  • Exelon's offices are-gasp!-in another state.

No, I'm not kidding.

Yes, energy giant Enron did collapse in 2000, but its collapse wasn't because of the merger of electricity companies. It collapsed because the firm branched out into industries where it had no expertise and where it overpaid for assets. It then tried to hide the losses with accounting tricks, but the losses became so big that they sunk the company. Unless Exelon makes a bid for Metallgesellschaft AG (one of the bad Enron acquisitions, now a part of GEA Group), it's hard to see what bearing the Enron experience has on Exelon-Constellation.

It's also hard to see what bearing the Bush tax cuts, declining unionism, the stagnation of middle-class income, and the housing bubble have on the merger. As for Mr. Potter, he was a fictional character in a 1946 movie, not a participant in the proposed Exelon-Constellation merger.

Rodricks' last objection is, I think, the real concern-both for Rodricks and the O'Malley administration. With the merger, Maryland would lose one of its precious few major corporate citizens faster than you can say Tiebout competition. The loss would raise further embarrassing questions about Maryland's mediocre (and underachieving) business climate and reputation for crony capitalism. Those are questions that the state's political leaders and their supporters would rather not face.