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NJ Regulators: Exelon-PSEG Market Power Could Threaten BGS Auction

In urging FERC to take a good, hard look at the proposed merger of Exelon Corp. and Public Service Enterprise Group (PSEG), the New Jersey Board of Public Utilities (NJBPU) is worried that "significant market power" in the PJM area resulting from the combination could undercut the viability of an annual basic generation service (BGS) auction held in New Jersey [EC05-43-000].

In its April 1 filing, the NJBPU noted that because Public Service Electric & Gas (PSE&G) and the state's three other investor-owned electric public utilities are required to serve as providers of last resort but no longer own sufficient generating facilities to serve retail load that has not switched, the NJBPU has sanctioned annual BGS auctions to serve this retail load. PSE&G is a unit of PSEG.

"The proposed merger of Exelon and PSEG raises numerous regulatory and economic issues that the Commission must carefully review and decide," the NJBPU told FERC. "Of most concern to the NJBPU is the acknowledged creation of significant market power in the PJM area most relevant to the BGS auction. The NJBPU views the creation of this market power as a serious threat to the viability of the BGS auction, and a potential vehicle for the abuse of captive retail customers, which might potentially result in the capture of monopoly rents by the merging companies." The NJBPU said this concern is "aggravated by the significant gas assets under the control of the merging entities."

The state regulatory body noted that the FERC-approved PJM market monitoring plan provides, among other things, that an interested entity may at any time ask the market monitoring unit (MMU) to conduct an investigation or take any other action contemplated by the plan.

The NJBPU disclosed that in a March 29 letter, it asked the PJM MMU to initiate a study of the impacts of the Exelon acquisition of PSEG on the state of competition in the PJM market and sub-markets. The MMU was also asked to prepare and submit to the NJBPU a full report (subject to appropriate and relevant confidentiality concerns) on that study, including recommendations as to any and all remedial actions that need to be taken to fully mitigate the market power created by the acquisition.

The NJBPU has asked that this study be given the highest priority in scheduling by the MMU, given the current schedules for considering the merger application before FERC, as well as the joint petition before the NJBPU for approval of the proposed merger.

"The proposed mitigation plan offered by Exelon and PSEG should be thoroughly examined in an open and transparent forum at the Commission," the state regulatory body said. Such a forum, the NJBPU said, should include "the benefit of input from the PJM-MMU and other market power experts, so that the states most affected by the proposed merger, as well as their captive retail customers, and numerous other affected intervenors can subject the mitigation proposal to public scrutiny and testing to assure the public interests of the ratepayers are not being subjugated to the private interests of the filing companies."

If the mitigation proposal filed by Exelon and PSEG "does not, in fact, completely eliminate the negative effects of market power in the relevant PJM areas, competition and rates will be adversely affected. A determination with respect to this issue should be made in full public view, based on a full public record established in a forum protected by the extensive due process protections of federal law."

The NJBPU therefore asked FERC to "conduct the necessary investigation and include evidentiary hearings that are needed to protect the public interest and to establish a public record and make it available to consumers, regulators and affected intervenors. This watershed merger and the issue of market power implicated therein deserve a thorough and timely public review in the Commission's regulatory forum."

In an April 6 filing made at the Securities and Exchange Commission (SEC), Exelon said that if FERC decides to hold hearings on the merger, the approval process for the transaction would extend the anticipated closing of the merger "into mid-2006 or perhaps later."

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