Rosapepe Urges BGE Spinoff As Merger Condition

The following is a letter from Sen. Jim Rosapepe and Sen. E.J. Pipkin to David Collins, executive secretary of the Maryland Public Service Commission.

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As you know, BGE ratepayers have suffered in recent years from excessive electric rates and power failures caused by the deregulation of rates in 1999. The Maryland Senate has repeatedly urged return to the regulated system that worked well for nearly 100 years.

CEG profits have been supported by ratepayers in the following ways (i) CEG sells its own power to its BG&E subsidiary in an oligopolistic market; (ii) CEG avoids constructing natural gas-fired electricity plants in Maryland, even after CEG spends billions to buy such plants elsewhere; and (iii) CEG sold 49% of its nuclear energy division—principally Calvert Cliffs—at a $4 billion profit and reserved a mere fraction of this profit for ratepayer relief.

We believe that the proposed merger of Constellation Energy and Exelon provides the opportunity to bring back "your father’s BGE": lower rates and more reliable service. The law requires you to approve the merger only if it is "in the public interest." Testimony for a variety of witnesses has documented that, in the absence of asset spinoffs, the merger will increase monopoly power and raise rates. That may be good for Exelon and Constellation, but it is not "in the public interest" and thus would violate state law.

We believe that the PSC can comply with the law, reduce rates for consumers, improve the reliability of power, and assure long term stability for energy supply and electric rates by conditioning approval of the merger on the following:

• Spinoff of BG&E as an independent, publically-traded, Baltimore-based company. To allow BG&E’s ratepayers to escape the profit-maximization tactics of CEG, we propose that BG&E be spun off as an independent, publicly-traded company. Based on the values of comparable publicly-traded utilities, the newly-independent BG&E should have a market value of about $1.6 billion. As a result, the value of the $7 billion merger will decline by this amount; however, existing CEG stockholders will each receive one new BG&E share for each CEG share they hold, so CEG stockholders will suffer no losses on the value of their CEG stock from the spin-off.

• A long-term contact between BGE and Constellation for 500 Mw of Calvert Cliffs’ capacity (about 25%) at regulated rates saving Standard Offer Service (SOS) customers a minimum of 15% per year. This calculation is based on BGE’s current power costs for SOS of about 10 cents per kwh, estimated Calvert Cliffs power costs of about 5 cents per kwh, and a BGE base load of about 2,500 MW. The loss in income to CEG/EXC stockholders from this arrangement should be offset mostly from merger-related synergies in CEG’s marketing and generation divisions.

• Commitment by the newly independent BGE to construct its own natural gas-fired electricity plants, or other economical alternatives, under regulated rates for needed additional base load generation. Recent research work —in consultation with General Electric (gas turbine manufacturer) and Anadarko Petroleum (large gas supplier) indicates the natural-gas-related savings to ratepayers could be 20-25% off PJM generation costs. Excluding permitting and siting, new gas fired generation construction requires about 18 months.

This approach will not hurt Constellation stockholders since, while they will get a slightly reduced price for their Consideration stock, they will retain shares in the newly independent BGE. It will give Exelon most of what it seeks in the merger – Constellation’s national industrial and commercial customers and marketing and trading platform – and offset the hit to Exelon’s earnings from the long term contract for lower cost, regulated power from Calvert Cliffs with the short term benefits Exelon proposed for Maryland (one time $100 rebate, etc). Finally, it will drive further reductions in electric rates since the newly independent BGE will have the incentive which Constellation and Exelon don’t have to build new, lower cost gas generation plants.

Thank you for your consideration of our recommendations and let us know if you have questions. We can be reached at 410-841-3141. Jeff Hooke, a local investment banker who worked with us in preparing this proposal, can be reached at jeff.hooke@focusbankers.com or 301-850-2532."

Senator E.J. Pipkin and Senator Jim Rosapepe