The U.S. Department of Justice (DOJ) in the May 10 Federal Register said that it has received little opposition to a proposed settlement of an antitrust complaint related to the March 12 merger of Exelon Corp. (NYSE: EXC) and Constellation Energy Group.
Justice has mandated the sale of three coal plants in order to ease merger-related concerns about market power in PJM.
DOJ published one comment it received on the proposed final judgment in United States v. Exelon Corporation, et al. That comment was also filed in the U.S. District Court for the District of Columbia on April 26, together with the DOJ response to the comment.
“After careful consideration of the comment submitted, the United States continues to believe that the proposed Final Judgment will provide an effective and appropriate remedy for the antitrust violation alleged in the Complaint,” said the DOJ notice. “The United States will move the Court for entry of the proposed Final Judgment after the public comment and this response have been published in the Federal Register.”
Exelon and Constellation are two of the largest sellers of wholesale electricity in all or parts of Delaware, Illinois, Indiana, Kentucky, Maryland, Michigan, New Jersey, North Carolina, Ohio, Pennsylvania, Tennessee, Virginia, West Virginia and the District of Columbia. In December 2011, the United States filed a civil antitrust complaint alleging that the proposed merger of Exelon and Constellation would substantially lessen competition in the provision of wholesale electricity in parts of the Mid-Atlantic states and result in higher wholesale electricity prices, raising retail electricity prices for residential, commercial, and industrial customers in these markets. Simultaneously with the filing of the complaint, the United States filed the proposed final judgment and a hold separate stipulation and order. The court signed and entered the hold separate order on Dec. 30, 2011.
During the 60-day comment period, the United States received one public comment, authored by Dr. Charles Rogers. Among other things, Rogers raised a concern that Exelon’s promised sale of the Brandon Shores, H A Wagner and C P Crane plants, largely fired by coal and located in the Baltimore area, would relieve it of ‘‘three old dirty generating plants” that are relatively costly to run, and that this sale wouldn’t really mitigate its market power in the region. By depriving the merged firm of key assets that would have made it profitable for it to withhold output and raise prices, the proposed final judgment seeks to restore effective competition and assure that the merger is not likely to lead to consumer harm, DOJ responded.
“How can the USDOJ allow itself to be bought off by Exelon dumping three old dirty generating plants thereby relieving itself of massive costs to comply with EPA requirements and roll over by this magical madness?” Rogers wrote. “The anti-trust division of the USDOJ has failed miserably to do its job, while allowing a massive multi-state energy merger, which degrades each state Public Service Commission’s ability to prevent abuse of the customers. This is the very definition of restraint of trade and abuse of government sanctioned franchise power.”
Said DOJ in its Dec. 21, 2011, court filing that settled the case: “Although the divestiture will reduce market shares and concentration levels compared to the levels that would have prevailed absent divestiture, the purpose of the divestiture is to preserve competition, not merely maintain HHIs or market shares at their pre-merger levels. Accordingly, the proposed Final Judgment seeks to restore effective competition by depriving Exelon of key assets that would have made it profitable for it to withhold output and raise prices in PJM Mid-Atlantic North and PJM Mid-Atlantic South. Capacity at all three divestiture plants consists primarily of coal-fired units which, depending on demand levels, would have increased either the incentive or the ability of Exelon to exercise market power. Divestiture of the three plants eliminates that increased ability and incentive. In this way, the proposed Final Judgment assures that the merger is not likely to lead to consumer harm.”
HHIs stands for Herfindahl-Hirschman Index, a key measuring tool that DOJ uses to assess market concentration in antitrust cases.
Exelon has to keep the three plants in the hunt for power sales
The hold separate agreement with DOJ includes terms requiring that Exelon maintain the three plants as economically viable and competitive facilities while the process to sell them goes on. It also includes terms ensuring that Exelon does not withhold output from the plant from the wholesale electricity market. In particular, the deal requires that it offer the output from certain generating units into the PJM auctions at no more than specified price levels until the plants are sold.
Said Exelon about the situation with the three plants in its May 10 Form 10-Q statement: “Associated with certain of the regulatory approvals required for the merger, Exelon and Constellation agreed to enter into contracts to sell three Constellation generating stations located in PJM within 150 days (unless extended by DOJ) following the merger completion and will be required to complete the divestitures within 30 days after receipt of regulatory approvals. These stations, Brandon Shores and H.A. Wagner in Anne Arundel County, Maryland, and C.P. Crane in Baltimore County, Maryland, include base-load, coal-fired generation units plus associated gas/oil units located at the same sites, and total 2,648 MW of generation capacity.”
In October 2011, Exelon and Constellation reached a settlement with the PJM Independent Market Monitor, who had previously raised market power concerns regarding the merger. The settlement contains a number of commitments by Exelon, including limiting the universe of potential buyers of the three plants to entities without significant market shares in the relevant PJM markets. The settlement also includes assurances about how Exelon will bid these units into the PJM markets. As of March 31, these assets are classified as held for sale on Exelon’s books.
Last of the Exelon coal/oil units in Pa. due to shut May 31
In a separate matter, Exelon in the Form 10-Q updated the phased shutdown of three coal-fired units and one oil-fired unit that it had already controlled, pre-merger, and are located in Pennsylvania. In 2009, Exelon announced its intention to permanently retire these units effective May 31, 2011, due to poor unit economics. However, PJM determined that transmission reliability upgrades would be necessary to alleviate reliability impacts and that those upgrades would be completed in a manner that will permit retirement of two of the units on that date and two of the units subsequent to May 31, 2011.
On May 31, 2011, Cromby Unit 1 and Eddystone Unit 1 were retired. Cromby Unit 2 was retired on Dec. 31, 2011, and Eddystone Unit 2 will retire on May 31 of this year.
The Form 10-Q also noted Exelon’s efforts to comply with the U.S. Environmental Protection Agency’s new Mercury and Air Toxics Standards (MATS) and Cross-State Air Pollution Rule (CSAPR). Conemaugh is a big coal-fired plant in Pennsylvania that Exelon owned part of to begin with, then acquired more of in the Constellation merger.
“Exelon, along with the other co-owners of Conemaugh Generating Station are moving forward with plans to improve the existing scrubbers and install Selective Catalytic Reduction (SCR) controls to meet the mercury removal requirements of MATS by January 1, 2015,” said the Form 10-Q. “Owners of oil units not currently meeting the proposed emission standards may choose to convert the units to light oils or natural gas, install control technologies, or retire the units. In addition, Generation owns three base-load, coal-fired generation units in Maryland that were acquired in the merger with Constellation – Brandon Shores, H.A. Wagner and C.P. Crane. However, in connection with certain of the regulatory approvals required for the merger Exelon agreed to divest these generating stations. It is anticipated that these plants are well positioned to comply with CSAPR and MATS since Maryland has adopted SO2, NOx, and mercury emission limits under its Healthy Air Act and Clean Power Rule that are generally consistent with the requirements of CSAPR and MATS.”