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NJ BPU Urged to Reject Exelon-PSEG Deal; Exelon CEO Offers Assurances

The New Jersey Division of Rate Counsel has filed a brief urging the New Jersey Board of Public Utilities (BPU) and the administrative law judge (ALJ) hearing the case to reject the pending merger of Public Service Enterprise Group (PSEG) with Exelon Corp. as currently proposed. The initial brief was filed by New Jersey Division of Rate Counsel Director Seema Sing.

Meanwhile, John Rowe, the CEO of Exelon, used a conference call with investors last Wednesday to say that "at the present time, we believe we can get the deal done. We believe we will get it done in a way that will add value to our shareholders."

"Every New Jersey ratepayer should be concerned about the potential impact of the Exelon and PSEG merger as it is currently proposed," New Jersey Public Advocate Ronald Chen said. "By consolidating so much generating power under one company, the proposed merger would reduce competition and could lead to dramatic increases in electric and natural gas prices for all New Jersey ratepayers, not just PSE&G customers, because all New Jersey utilities buy power from the same energy generators. The merger also could reduce the reliability and quality of service for PSE&G customers, which is a significant issue for homeowners and businesses."

The initial brief was filed by Singh with ALJ Richard McGill, who is hearing the matter on behalf of the BPU. The BPU must ultimately decide whether or not to approve the merger.

"We thoroughly reviewed the proposed merger, 17 days of hearings were held, and expert witnesses for all parties testified. The administrative law judge and the Board of Public Utilities should reject the merger as it is currently proposed for failing to establish 'positive benefits' for the citizens of New Jersey," Singh said. "The rewards are too small and the risks are too great for the proposed merger."

The Division of Rate Counsel, formerly the Ratepayer Advocate but now a division of the New Jersey Department of the Public Advocate, was charged with reviewing the merger under the positive benefits standard of review adopted by the BPU. This standard of review means that to be approved the merger must be found to have a positive impact on competition, rates, service and employees.

The state rate counsel also examined the overall impact of the merger on New Jersey's economy, as well as its impact on low-income ratepayers.

The largest single concern is that the proposed merger would result in a company that is so large, and controls such a significant segment of the gas and electric generation markets, that it could exert market power to drive up energy prices for all New Jersey ratepayers, according to the New Jersey Department of the Public Advocate.

To address the concerns about market power, the companies have proposed a "virtual divestiture" under which they would sell off some of the output from their power plants for a period of time. The New Jersey Rate Counsel contended in the brief that the proposed virtual divestiture is an untested concept that would leave ownership of the power generating facilities in the control of the companies, which does not address the problem of market power.

The rate counsel contended that the only way to adequately address the issue of market power is through a concrete plan by the companies to divest themselves of power generating facilities.

The merger was approved by FERC in June 2005 and the Pennsylvania Public Utility Commission (PAPUC) voted unanimously to approve the merger and associated settlement terms on Jan. 27. Various other states have given approvals related to the merger, including New York, Texas and Connecticut.

In New Jersey, hearings for the merger review concluded at the end of March 2006. Settlement discussions began in December and are expected to resume soon.

The New Jersey ALJ is expected to issue an initial decision in June and the BPU will then make the final decision on whether the proposed merger should be approved.

Approval of the merger by the Nuclear Regulatory Commission is expected soon, Exelon said in a press release announcing first quarter 2006 earnings results. The other remaining regulatory review is the U.S. Department of Justice (DOJ).

Exelon said it expects to complete all of the regulatory reviews and close the merger in the third quarter of 2006, but during a conference call more than one analyst questioned Exelon executives about language in the earnings release related to the merger.

Specifically, analysts zeroed in on a prepared statement included in the release in which Rowe said, "While our efforts to secure approval of our proposed merger with PSEG have progressed slowly, we believe we will be able to complete the merger and are committed to that end as long as the deal continues to make economic sense."

One Wall Street professional asked Exelon officials to detail the key issues that might cause the deal not to make economic sense.

Rowe noted that "there are, I think, only two and they would have to be reviewed in the context of the merger agreement itself. In other words, we pledged...to do a deal and there are only a couple of exceptions to that in the agreement." Rowe said that "at the present time, we believe that the deal can be done and those exceptions will not be triggered. One of those exceptions related to having to sell nuclear capacity," he noted.

"[W]e recognize and they recognize that the demands of the state of New Jersey and whatever the DOJ ultimately may require may be different than we initially proposed and each of us will do what our fiduciary duties require and take a last look at the package when we finally know what all those conditions are."

Rowe said that "I don't want to sound like in any way I'm flinching on our belief that this deal remains doable and remains a good deal for shareholders. You will find no equivocation from me on that at all and I think you will get none from Jim Ferland [CEO of PSEG] either."

An Exelon official participating in the conference call noted that there is a "burdensome order" provision in the merger agreement, "which essentially would be an out for either side if a burdensome order is entered in connection with the merger."

The Exelon official said that burdensome order "is defined as one of four things. One, something that created a material adverse affect. Two, that we would be required to divest nuclear assets. Three, that we would be required to divest more than 2,600 megawatts in the virtual auction." The fourth factor relates to the extent of divestiture "on the fossil side."

At a later point, Rowe said that Exelon couldn't elaborate on what may be holding up a response from the DOJ to the merger.

"We cannot tell you because we are in discussions with them as we speak," the Exelon official said. "And there is an understanding that we won't talk about those discussions until we know the results. We continue to believe that we can get to an acceptable answer, but we don't have one worked out yet."

Exelon's first quarter 2006 consolidated earnings prepared in accordance with GAAP were $400 million, or $0.59 per diluted share, compared with earnings of $521 million, or $0.77 per diluted share, in the first quarter of 2005.

Exelon's adjusted (non-GAAP) operating earnings for the first quarter of 2006 were $420 million, or $0.62 per diluted share, compared with $452 million, or $0.67 per diluted share, for the same period in 2005. The decrease in adjusted (non-GAAP) operating earnings per share was the result of several factors, including unfavorable weather conditions in the Commonwealth Edison Co. and PECO Energy Co. service territories. This and other factors were partially offset by higher margins on wholesale market sales at Exelon Generation Company LLC.

Excluding the effects of unfavorable weather and timing-related items in the first quarter of 2006 and favorable one-time items in the first quarter of 2005, operating earnings increased in line with management expectations.

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