The Star-Ledger

Giant Utility Merger Must Be Done Right

The Star-Ledger — Sunday, July 23, 2006

Mammoth. Monumental. Record-setting. Apt words to describe the proposed $16.7 billion merger of Exelon and Pub lic Service Enterprise Group, the parent of electric and gas company PSE&G. And also the words that should describe the benefits to New Jerseyans if the plan to create America's largest utility wins approval from the state Board of Public Utilities.

The BPU, which has the final say on the proposed merger, and the electric compa nies are deep into secret negotiations to decide the issue.

No one on the outside knows quite what is being offered in possible rate relief for customers, reliability standards or other demands. But there is no mystery about the framework the BPU must insist upon before it gives Exelon, a Midwestern mega-corporation, the green light to swallow a company that has been an integral part of New Jersey's economic and social fabric since 1903.

Rates and reliability are the main issues for Jerseyans and not just for the 2.1 million families and businesses that pay their monthly electric bills to PSE&G. The sheer size of this merger would affect everyone in New Jersey.

Experts and watchdogs, from state Public Advocate Ronald Chen to citizens' groups to the BPU's staff, have warned that the wedding of Exelon and Public Service could create a corporate giant with the heft to boost electric rates throughout the region.

This is called "market power," and Exelon has an army of its own high-priced economic experts who say that the worry is groundless. The company's position got support last month from the U.S. Jus tice Department, which ruled that price gouging could be prevented if the new company sells six older coal- and natural gas-fired power plants, four in New Jersey and two in Pennsylvania.

Critics, however, got further ammunition on Friday, when an independent analyst for the regional power grid that includes New Jersey said those sales weren't enough.

The arguments are as complex and nuanced as regulatory issues get and are impossible for lay persons to judge. But neither the feds nor anyone else has gotten a firm handle on the dynamics of the deregulated electricity markets, which have failed to live up to promises of robust competition and significantly lower rates. Having fewer independent players in any market creates a serious poten tial for price-setting mischief.

The sheer weight of expert opposition to the Exelon merger means the BPU must err on the side of caution. The board's five commissioners should reject this deal unless it is crafted to eliminate any legitimate question about the new utility's ability to inflate rates.

Guarding against the prospect of price finagling isn't enough. The BPU also must en sure that Public Service customers get their fair share of the immediate financial benefits that are prompting the utilities to seek merger.

Exelon has publicly talked of a package of rate cuts and deferred pending rate increases that the firm says total about $500 million. In addition, the company says consumers will see lower rates, or at least rates that won't rise as quickly in coming years, because Exelon can operate Public Service's nuclear plants much more productively.

The theory is correct. A more productive nuclear plant feeds more cheap power into the electricity grid, helping to hold down wholesale prices. Exelon says these efficiencies will provide up to $1.1 billion of value to consumers over the next 10 years.

But this is Jersey. Show us the cash.

A ready benchmark to help judge any Exelon offer is available: Five years ago, the Ohio company that bought Jersey Central Power & Light agreed to $300 million in direct rate relief. That was a $4.5 billion merger. Exelon-PSE&G is a deal almost four times larger, a $16.7 billion combination.

The exact number of Exelon's direct and definite consumer benefits may not equal a simple four times the JCP&L figure, but the BPU must insist that benefits to ordinary citizens and businesses be proportionate to the scale of the merger.

Ensuring reliable electric service is the other main re quirement for any merger agreement. Here, the key is not what a merger might bring but the danger of what it might take away from Public Service.

PSE&G has one of the best records in the nation for minimizing the number and dura tion of power outages, although citizens suffering the after-ef fects of last week's violent storms might find it hard to be lieve. Exelon's current electric operating companies, PECO in southeastern Pennsylvania and ComEd in Illinois, post less impressive reliability and customer satisfaction statistics.

Exelon has pledged to continue Public Service's more than $500 million-a-year investment in equipment, lines and the like. The BPU should insist on guarantees that the new utility does not backslide on reliability measures, even if that means the infrastructure investment must rise. The cur rent rate of capital spending should be a floor, not a ceiling.

Exelon and Public Service will say such conditions are un duly severe. Some of their critics say that they're too soft and that there are no circumstances in which a merger would be appropriate. Neither position is correct.

A merger deal that meets the needs of Jerseyans as well as those of corporate executives won't be easy to achieve. But the BPU and New Jersey cannot settle for less.

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