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'Unprecedented' Divesiture Cited in FERC Approval of Exelon-PSEG Deal

FERC last Thursday approved the mega-merger between Exelon Corp. and Public Service Enterprise Group (PSEG), marking a key regulatory hurdle that the transaction needed to vault. FERC signed off on the deal at its latest open meeting, but said that the two companies will also need to make a number of compliance filings at the Commission in the wake of this week's decision.

Commissioner Joseph Kelliher (the new chairman of FERC) noted that prior to the Exelon-PSEG deal, the agency "hadn't dealt with a large merger in a number of years. So there were some questions as to would the Commission apply the [merger] test as stated or would it be adjusting a test."

What FERC's doing with the Exelon-PSEG deal is "applying the same test we've applied in over 100 different transactions in virtually a decade and there's no reason to think that the test that we've applied in the past is inadequate and that's what we're applying here."

Kelliher said that the two utilities offered up "very robust" mitigation, with a combined 6,600 MW of physical and "virtual" divestiture. He said this MW divestiture number is "really unprecedented at the Commission."

"This divestiture of 6,600 megawatts is probably bigger than all but a handful of utilities in the whole country -- just in the divestiture part of this alone," added FERC Chairman Patrick Wood.

FERC Commissioner Nora Brownell said that "our merger policy is quite clear about what we look at. The applicants looked at that policy, put mitigation on the table, and in response to issues raised, put additional mitigation on the table and it is our responsibility to be focused and disciplined on what we do in mergers."

She said that "while there will be people dissatisfied, I'm sure, with this, I think that the staff and the intervenors and the applicants have been pretty clear in answering the questions that have been raised that are appropriate for this agency to address."

Commissioner Sueeden Kelly said what shouldn't be lost in the shuffle is the fact that the merger offers benefits. She noted Exelon's "outstanding experience" in operating nuclear generators. Exelon "has been very successful operating nuclear units. Its fleet has approximately a 94% capacity factor."

PSEG also operates nuclear power plants. The capacity factor at PSEG's nuclear fleet is currently closer to 81%, Kelly noted. "It's expected that the merger will result in the adoption of best practices and will in turn result in PSEG's nuclear units increasing their capacity factor, hopefully, to match Exelon's. And that result would be a substantial increase in additional generation available to customers without additional cost and that is a truly significant benefit to consumers."

Under the Federal Power Act and the standards set under the Commission's 1996 merger policy guidelines (Order No.592), the Commission reviews public utility mergers to evaluate the transaction's effect on competition, rates and regulation. The Commission must approve a merger if it finds it is consistent with the public interest.

The companies have committed to divest 4,000 MW of intermediate and peaking generation facilities located primarily in eastern PJM Interconnection, and to sell energy from 2,600 MW of nuclear capacity, which they characterize as a "virtual divestiture."

With this proposed mitigation, the merger will not harm competition, the Commission concluded. Further, the Commission said Exelon and PSEG responded to all issues raised by protestors to the merger.

"We have recognized that operational control of generation resources is a key element of market power analysis and mitigation," the Commission said, noting that "the virtual divestiture effectively transfers control of the output of 2,600 MW of nuclear capacity from the merged firm to the purchasers."

An independent auction monitor will oversee the companies' compliance with the virtual divestiture commitment. In addition, the applicants will set up a public compliance website that will show how they are complying with the virtual divestiture and other mitigation requirements.

The Commission accepted Exelon's and PSEG's identification of a pool of generation available for divestiture rather than specific generating plants. This addresses the concern that Exelon might divest its least efficient units, the Commission said. "Establishing a pool of generation eligible for divestiture allows the potential buyers of the plants to bid on the ones that they most highly value."

Because the applicants identified the general location and cost characteristics of the generation facilities to be divested, the Commission determined that, based on reasonable assumptions about the buyers of the assets, there would be no harm to competition. In addition, FERC relied upon the commitment to provide an updated analysis of the merger's effect on competition, based on the actual acquirers of the actual divested assets, once they are known. If subsequent analysis shows that the merger's harm to competition has not been sufficiently mitigated, the Commission said it would require additional mitigation at that time.

The Commission further found the applicants' combination of generation and transmission facilities will not harm competition, noting that both companies have transferred control of their transmission systems to the PJM regional transmission organization. Such transfer "mitigates the ability to use control of transmission assets to harm competition in wholesale markets," the Commission concluded.

The merger still requires a number of other federal and state regulatory approvals, including the New Jersey Board of Public Utilities (NJBPU). The NJBPU recently approved a broader "positive benefits" standard -- rather than a "no harm" standard -- to be used in evaluating the proposed merger.

With the NJBPU's decision, Exelon and PSEG will be required to show that the proposed acquisition is in the best interest of the public and that Public Service Electric & Gas (PSE&G) customers will benefit from it. PSE&G is New Jersey's largest regulated gas and electric delivery utility and a PSEG unit.

Because of the "magnitude and potential ramifications" of the acquisition of PSEG by Exelon, the NJBPU concluded that a close and careful scrutiny above and beyond the minimum standard is required and therefore a more comprehensive review standard should be used.

A FERC staff member noted that the Commission is requiring Exelon and PSEG to "make a number of filings detailing their compliance with the commitments they have made regarding fossil divestitures, the interim mitigation and the ongoing virtual divestiture process."

The staff member said that "a number of issues that will be settled over the next 12 months require compliance filings along the way and the key is the interim mitigation will be in place at the time of the consummation."

Another Commission staff member said that "the bottom line is that there is a definite timetable of 12 months. They cannot extend it at the end of 12 months. If the divestitures have not solved the concentration problem, then the Commission reserves the right in the draft order to order additional mitigation at that point."

The Exelon-PSEG deal was first unveiled at the end of 2004. Since that time, two additional mega-mergers have been proposed in the utility sector -- Duke Energy's proposed combination with Cinergy and MidAmerican Energy Holdings Co.'s plans to buy PacifiCorp from United Kingdom-based ScottishPower.

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