- The Washington Times - Wednesday, October 25, 2006

Constellation Energy Group Inc., after months of regulatory uncertainty and legal wrangling, called off its $12 billion acquisition by FPL Group Inc. yesterday.

The parent company of Baltimore Gas & Electric Co., in a joint statement with the Juno Beach, Fla., energy company, said “continued uncertainty over regulatory and judicial matters in Maryland” led to the decision.

The companies said the agreement to terminate the deal was mutual. Neither Constellation nor FPL Group will pay breakup fees.

“As we considered the situation in Maryland, we determined the risks and uncertainties were too significant to overcome,” said Mayo A. Shattuck III, Constellation’s president, chairman and chief executive.

The acquisition would have created the nation’s largest energy supplier with power plants stretching from Maine to Florida and combined revenue of $28 billion.

The deal, announced in December, came under scrutiny after Maryland’s utility regulator, the Public Service Commission, in March said electricity rates for BGE residential customers would climb by 72 percent in July, when rate caps imposed under a 1999 deregulation law expired.

The announcement set off a political firestorm as consumer groups and state legislators sought concessions from Constellation to help ease the BGE rate increase, which many tried to link with the FPL takeover.

In a special session, lawmakers passed a bill that fired the Public Service Commission and capped the rate increases at 15 percent for 11 months. Beginning next June, BGE customers would pay the full amount of their bills, with a 10-year, monthly interest payment of $2.19.

The deal called for Constellation to spend $386 million it has collected in fees from consumers as a “giveback” to rate payers.

Consumer groups yesterday welcomed news of the derailed acquisition.

“This is a tremendous victory for Maryland consumers,” said Johanna Neumann, a policy advocate for the Maryland Public Interest Research Group. “If the majority of the generating capacity in the state was owned by an out-of-state company, it really raises the question of what authority do state regulators have?”

Constellation spokesman Robert L. Gould said the acquisition would have provided considerable rate relief to BGE’s 1.1 million residential customers in central Maryland.

“From a consumer perspective, we had $600 million that was associated with this whole transaction,” said Mr. Gould, referring to the $386 million in givebacks combined with estimated merger-related cost savings of $214 million, which “is certainly not available anymore” now that the deal is off.

“There is a question of legal efficacy when it comes to the $386 million,” said Mr. Gould, who did not say if the company planned to take legal action over the givebacks, which it has contended was tied to the merger.

“We fully plan to have discussions with key stakeholders about developing a solution that would work toward the benefit of rate payers, but at the same time make sure that BGE remains financially strong,” he said.

Maryland Gov. Robert L. Ehrlich Jr., a Republican seeking re-election next month, said he was “not surprised” by the decision to scrap the Constellation-FPL Group deal.

“When you impact the regulatory environment … the way [Maryland legislators] did, it makes a lot of people very leery about dealing with your state,” Mr. Ehrlich said. “We will see what litigation ensues now, which will be interesting.”

Maryland House Speaker Michael E. Busch, Anne Arundel County Democrat, and Senate President Thomas V. “Mike” Miller Jr., a Democrat representing Calvert and Prince George’s counties, did not return calls for comment.

In 2005, BGE earnings accounted for less than one-third of its parent company’s total profits. Like FPL Group, Constellation makes most of its money from its unregulated competitive energy business, which sells electricity and natural gas to large industrial customers, governments and other utilities.

Michael S. Worms, an analyst with BMO Capital Markets in New York, said Constellation needed the acquisition more than FPL Group.

“On a stand-alone basis, FPL has solid earnings growth; they’ve got vibrant customer growth, they’ve got a four-year rate plan and they’ve got good dealings with Florida regulators,” said Mr. Worms, noting that the Florida company also leads the country in wind-energy development.

The acquisition would have provided Constellation the increased buying power it needs to continue growing at the rate it wants, he said.

Mr. Worms owns shares of FPL Group but not of Constellation.

The post-deregulation experience in Maryland is not unique. Exelon Corp. last month recalled its $17.8 billion offer for Public Service Enterprise Group Inc. after a prolonged fight with New Jersey utility regulators. As in Maryland, electricity rates soared in New Jersey after lawmakers froze them.

Approval of the Constellation acquisition was recently thrown into doubt after the Maryland Appeals Court overturned the legislature’s firing of the Public Service Commission, yet upheld a provision of the legislation that barred the current commissioners from voting on the deal.

• S.A. Miller contributed to this article.

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