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Analyst Still Sees 75% Chance Exelon-PSEG Merger Will Proceed Without Hearing

Despite the vociferous opposition to a FERC decision on the merger of Exelon Corp. and Public Service Enterprise Group (PSEG) without a hearing, analyst Christine Tezak of the Stanford Washington Research Group still predicts there's a 75% chance that is exactly what will happen, "possibly by the end of June."

A recent offering on May 9 by the two companies of additional market power mitigation measures in exchange for FERC agreeing to sign off on the deal without a hearing drew a chorus of open skepticism from multiple commenters over the last few weeks [EC05-43]. In order to pass market power screens, the companies initially offered to divest 1,000 MW of peaking capacity and 1,900 MW of mid-merit capacity, including at least 550 MW of coal-fired capacity.

On May 9, they increased their offering to include an additional 1,100 MW, which would be sold or swapped, and 2,600 MW that would be "virtually divested" through medium- or long-term contract nuclear energy sales. They also agreed to invest in economic transmission enhancements among other improvements, in order to address some of the concerns raised by outside parties.

However, the Pennsylvania Office of Consumer Advocate (OCA), the New Jersey Division of the Ratepayer Advocate, Pepco Holdings Inc. (PHI), PPL, First Energy and several other companies and groups said there still needs to be a full hearing to examine the market impact of the transaction.

Ameren Services Co. said in a supplemental protest that the merger partners' have not analyzed the effect of the proposed merger on energy markets in the western portion of the PJM Interconnection (PJM) or discrete submarkets. "Applicants seek to dismiss Ameren's concerns through novel theories regarding transmission flows and constraints and how they are managed by PJM. Reliance on these theories is misplaced, however, and a hearing is needed...," Ameren said.

The revised proposal by the merger partners, "still suffers from many of the same shortcomings as the original proposal," the Pennsylvania OCA added.

Some of the other intervenors said no amount of divestiture could remedy their concerns.

However, the merger partners said in an answer to protests last week that the PJM market monitor's (MMU) own analysis submitted at the request of the NJBPU "confirms the validity of the applicants' analysis. Although the MMU's approach is different in significant respects from the Appendix A analysis used by the Commission, the MMU reaches essentially the same conclusion that...the proposed transaction raises market power issues but that the applicants proposed mitigation can adequately address any increase in market power." However, MMU said it would need to know the exact generation being divested and the identity of the purchaser to confirm that the proposed divestiture would be adequate to mitigate market power.

The applicants added that PSEG's recent announcement that it plans to sell the 821 MW Waterford unit in Western PJM to AEP adequately addresses Ameren's concerns.

Tezak said she believes there still is only a "one-in-four chance" the Commission sends the merger to hearing. "We cannot rule out the Commission feeling that it must appease protestors by looking at the transaction in the contest of a fill blown proceeding," said Tezak. "However, our analysis finds far more reasons for the FERC to be comfortable accepting the application outright (with the additional terms offered May 9) avoiding a lengthy and expensive hearing.

"Given that the vast majority of observers think that the Commission will approve the merger we have a hard time believing that the FERC would initiate the full blown process for 'appearances' sake."

Tezak said she believes a hearing can be avoided because the mitigation being offered is solid and the PJM market monitor has said the transaction can be satisfactorily mitigated. The combined entity also would operate in the most advanced FERC-approved market.

"We are hard pressed to understand how a merger between two companies already in an RTO needs a lengthy hearing to arrive at an approval," the analyst said. "Either the market structures advocated by FERC work, or they don't. Remember, independent system operators and RTOs were initially envisioned by the FERC to contain large generation-only firms such as Enron (had it been successful in its business plan).

"It would be more than ironic if after all these efforts to build RTOs this merger winds up with more hurdles than deals proposed by market participants not in RTOs in spite of its credible mitigation proposal. Such an outcome would not indicate much of an incentive to join a FERC marketplace, in our view."

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