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Exelon-PSEG Merger Faces Wave of Resistance in FERC Filings

The drumbeat for a FERC hearing on the proposed mega-merger between Exelon Corp. and Public Service Enterprise Group (PSEG) is growing louder by the day. A number of parties last week urged the Commission not to provide rubber stamp approval of the pending deal, which would create a new company, Exelon Electric & Gas (EEG) [EC05-43]. Others went a step further, urging FERC to issue an outright rejection of the merger.

"The record as it currently exists raises a host of unanswered questions -- all of which undeniably are questions of material fact that preclude summary approval of the merger," Pepco Holdings Inc. said in its April 11 filing. "These questions must be evaluated much more fully through discovery and an evidentiary hearing before the Commission can reach a fully reasoned decision and properly discharge its responsibility of protecting the public interest."

Among other things, Pepco said that FERC should not consider EEG in isolation of the business rivalry that already exists in PJM, a regional transmission organization (RTO). The merger "obviously would have an immediate negative competitive impact," Pepco added. "PSEG is a substantial business enterprise and a formidable competitor within the PJM market. As the PJM market processes develop and without the merger, PSEG could become one of Exelon's most intense business rivals. However, the merger will cause the disappearance of PSEG from the market."

Pepco, based in Washington DC, warned that the merger "could create a powerful momentum toward creation of an oligopolistic PJM market structure as other PJM utilities consider mergers in order to match EEG's economic strengths and resources." If the merger were to be replicated by other utilities within PJM, the RTO "then would be served by a very few large utilities each with very large, approximately equal market shares."

Given the levels of market concentration, Pepco thinks that such mergers probably would fail the U.S. Department of Justice Herfindahl-Hirschman Index (HHI) criteria "in which case the Commission would need to approve the creation of these 'super-competitors' notwithstanding massive HHI violations."

Pepco said it doesn't necessarily oppose development of a PJM market dominated by three or four very larger vertically integrated utilities "that hopefully would engage in intense rivalry with each other." However, the utility believes that the mitigation restrictions proposed by Exelon and PSEG "would work to prevent such an outcome and instead would help to secure EEG's position as the dominant generation owner in PJM."

Pepco said that a FERC order setting the Exelon-PSEG deal for hearing should require the applicants' direct case to address the following issues, at a minimum -- (i) the likelihood of attempts to create other large EEG-type utilities in PJM and (ii) the methods (other than HHI analysis) the Commission will use to evaluate the public interest impacts of so restructuring PJM.

"Any applicant objection that the Commission should defer addressing these issues until such mergers are proposed would be without merit," said Pepco. "If the EEG merger sets in motion forces that would tend to reshape the structure of the market, the Commission needs to consider now whether unleashing those forces is consistent with the public interest."

In her April 11 filing, Illinois Attorney General Lisa Madigan said that merger-related impacts on PJM wholesale markets could undermine the ability of a proposed auction filed by Commonwealth Edison Co. (ComEd) to procure power at competitive prices for captive retail customers in Illinois. ComEd is an Exelon unit.

"This matter should be set for hearing to determine the full extent of the market power problems associated with the proposed merger and to examine the sufficiency of the mitigation measures proposed by Exelon and PSEG," Madigan said. "A thorough investigation and open hearing are necessary to ensure that electricity customers in Illinois, and elsewhere, are protected from negative impacts arising from this proposed transaction."

Meanwhile, the American Public Power Association (APPA) and the National Rural Electric Cooperative Association (NRECA) went one step further and said that the Commission should reject the application as deficient.

"Approval of the instant application would eliminate competition between the two largest utilities in their Regional Transmission Organization (RTO) region and establish a disastrous precedent for future merger proceedings at the Commission," said APPA and NRECA.

"While the applicants concede that their merger raises serious competition problems requiring substantial mitigation in the form of generation divestiture, their application flouts the Commission's filing regulations by failing to specify the generation they propose to divest," the associations added. "The application should be rejected as deficient."

If the Commission allows this proceeding to continue, "it should require the applicants to amend their application to remedy its deficiencies and establish a new 60-day period for public comment," the two associations said.

"Whether or not it requires amendment of the application, the Commission should direct the PJM MMU [market monitoring unit] to assess the merger and the necessary mitigation by submitting a publicly available, on-the-record report. This report, too, should be noticed, and the public provided an opportunity to comment on it."

Hoosier Energy Rural Electric Cooperative Inc. said that because the applicants "have failed to provide the specificity required by this Commission with regard to their mitigation proposal, the Commission should reject the application."

The cooperative said that it is clear that Exelon and PSEG "have understated the amount of generation that they control in submitting their analysis of the effect of the proposed merger on competition. Accordingly, that analysis cannot form the basis of a Commission conclusion that the proposed merger," even with the proposed mitigation measures, will be consistent with the public interest.

While saying that there is probably a 50-50 chance that FERC will decide to hold a formal hearing in response to the proposed merger between Exelon and PSEG, Stanford Washington Research Group Analyst Christine Tezak on Tuesday said she remains convinced the deal will ultimately procure FERC approval.

If FERC sets the merger for hearing, "some wonder if it will be hard for the companies to meet their targeted close date of 12-15 months from the filing dates, or the first half of 2006," noted Tezak. "The companies have indicated that their commitment is firm until June 2006 and can be extended by mutual agreement by an additional six months. At this juncture, we think a hearing process at the FERC can be accommodated by June 2006, should the commission elect to initiate one."

Tezak said her "view is unchanged that this transaction will ultimately win approval by the FERC. We believe there is probably a 50-50 chance that this transaction will get set for formal hearing, but at this time are not convinced it will fail to ultimately gain approval."

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