PSEG Merger Fizzles

The Bergen Record ( — Friday, September 15, 2006


Exelon Corp. backed out of its proposed purchase of Public Service Enterprise Group on Thursday, citing "insurmountable" differences with state regulators in New Jersey.

The announcement ends nearly 21 months of debate, speculation and negotiation that focused on whether the $17.8 billion deal would be good for New Jersey – as the companies claimed – or whether it would lead to higher utility rates – as opponents argued.

PSEG is the Newark-based parent of Public Service Electric and Gas Co., New Jersey's largest utility with more than 2.1 million customers. Combined with Chicago-based Exelon, the sale would have created the nation's largest utility with 7 million electric and 2 million gas customers.

The companies had been in extensive negotiations with the New Jersey Board of Public Utilities and other parties during the past month, and "over the last week or so it started to become more apparent that there's a big gap here, and that we're not going to be able to do it," said E. James Ferland, PSEG's chief executive.

As a result, he wasn't surprised when John Rowe, his counterpart at Exelon, broke the news Wednesday night that the deal was dead, Ferland said in a telephone interview.

The companies said the deal would have provided $1.5 billion in benefits to New Jersey, including $600 million in givebacks, in addition to lower energy rates.

With the deal off the table, PSE&G is expected to seek rate increases that it was willing to forego to gain BPU approval.

The BPU demanded more concessions, saying the combined entity would control too much generating capacity in the market, allowing it to control prices.

The BPU staff tried "to find a way we could get to a resolution of this case," but couldn't close the gap between the companies' proposal and the BPU's counteroffer, said the board's Executive Director Victor Fortkiewicz.

Making an agreement more difficult was a decision by the BPU commissioners that the sale would have to have positive benefits to New Jersey. Recent utility mergers only had to pass the "do not harm'' test, but the commission "thought it made sense" to have a positive benefits test, BPU President Jeanne Fox said.

Opponents of the sale, including New Jersey Public Advocate Ronald K. Chen, called Exelon's decision in the best interests of all New Jersey residents.

"We did not believe the companies offered enough direct and real rate relief for New Jersey families and businesses," Chen said.

When the sale agreement was announced in December 2004, the companies said it was contingent on regulatory approval from seven state and federal agencies, and five came quickly, including a key go-ahead from the Federal Energy Regulatory Commission.

The two holdouts included the BPU and the Department of Justice's antitrust division. The Justice Department approved the deal on June 22, contingent upon the companies selling four fossil-fuel fired electric generating stations in New Jersey and two in Pennsylvania, but the companies were unable to persuade the BPU that the deal would be good for New Jersey.

The BPU staff and the state's public advocate sought the sell-off of more generating plants. They said the merged company would still have the ability to manipulate markets, leading to higher prices for consumers and business customers in the state.

"The companies believed that the FERC and DOJ fully resolved the market power issues, but the [BPU] apparently feels different," Ferland said.

But New Jersey's standards are different, Fortkiewicz said. "We have an obligation to look at the facts."

Exelon's decision has one positive aspect, Ferland said. The uncertainty hasn't been good for the company and its employees. "At least we have an answer."

He stressed that PSEG remains strong financially.

"The merger would have provided strategic benefits for PSEG and real benefits for New Jersey," but its current standalone business outlook is one of the most positive in the company's history, he said.

Ferland said Exelon would continue to operate PSEG's three nuclear generating plants in South Jersey under a separate agreement the companies negotiated at the time of the sale. Exelon has improved the operating performance of the troubled Hope Creek and two Salem plants since taking control 20 months ago, and the contract can be extended for three additional years, Ferland said.

But the sale of other generating plants, which would have been required if the deal had gone through, will be withdrawn.

Thursday's announcement comes six weeks after the two utilities issued what was seen as an ultimatum to the BPU, saying they had gone as far as they could on givebacks to New Jersey.

They said they needed an answer from the BPU staff by Aug. 4, but the BPU rejected the deadline, and the two sides continued to negotiate until this week.

PSEG and Exelon were able to keep the news quiet until after the market closed Thursday. Trading in both was at normal volumes Thursday, with PSEG closing up 1 cent at $66.15 a share and Exelon down 50 cents at $57.77.

Both are up sharply from mid-December of 2004, when rumors of the sale first leaked out. At that time, PSEG was selling at $44.58 and Exelon at $43.38.

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What it means

PSE&G is expected to seek rate increases.

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Dec. 17: Shares of Public Service Enterprise Group soar on a report that Chicago-based Exelon is in advanced discussions to buy the company in a $12 billion stock deal.

Dec. 20: The companies make it official with plans - subject to regulatory approval - to create the nation's largest utility company. Exelon agrees to take over operation of PSEG's three troubled nuclear plans, even before the sale takes place.

Jan. 5: PSEG reveals that senior executives could reap up to $10 million in retention bonuses and millions more in termination pay under terms of the proposed sale.

Jan. 12: The chairwoman of Federal Energy Regulatory Commission says PSEG and Exelon will have to sell some generating assets to get government approval.

Jan. 17: Exelon takes over operations of the Hope Creek and two Salem nuclear plants.

Mar. 25: Consumer groups oppose the deal, saying the merged company would have too much control of the region's power market, leading to higher rates.

June 22: The New Jersey Board of Public Utilities votes unanimously that the companies would have to show that the sale would have "positive benefits" to customers and the state. Other deals have been approved by passing only the "do no harm'' test.

June 30: The U.S. Federal Energy Regulatory Commission approves the sale, now valued at $15 billion because of increases in stock prices.

July 19: PSEG stockholders overwhelmingly approve the sale, and Exelon investors do the same three days later.

Oct. 12: New Jersey's Large Energy Users Coalition - representing major corporations - opposes sale over concern about the combined company's market power.

Jan. 4: The state's independent ratepayer advocate comes out against the sale.

Jan. 27: Pennsylvania regulators approve the deal.

May 1: PSEG chairman tells analysts the deal is on track and could be resolved by the end of the month.

June 22: The U.S. Department of Justice's antitrust division gives its approval, contingent on the companies selling six fossil-fuel-fired electric generating stations to retain competition in the wholesale marketplace. Only BPU approval remains.

July 31: The companies make what they say is their final offer, including $600 million in givebacks and other concessions, and give the BPU staff a week to decide.

Aug. 4: The BPU rejects the deadline, but both sides say negotiations will continue.

Aug. 17: State regulators call for $220 million more in givebacks to customers and the sale of additional power plants as conditions for approving the deal, now worth $17.8 billion.

Aug. 30: Exelon says likelihood of deal going through is "no longer 'more likely than not.' "

Sept. 14: Companies call off the deal.

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