Consolidation of Power: How Exelon’s Bid to Acquire PSEG Could Raise Rates, Reduce Reliability, and Risk Public Safety

2005-01-11

Executive Summary

As the voice of New Jersey’s electricity consumers, the state Board of Public Utilities should reject Exelon’s proposal. The takeover would increase the monopolistic tendencies of the electricity market, threaten the reliability of electric service, increase risks to public safety, and reduce the ability of state regulators to defend the interests of electricity customers in New Jersey, leading to higher costs and poorer service.

The takeover would increase Exelon’s market power.
• If approved, the takeover would create the largest electric utility company in the country, with $79 billion in assets, 9 million customer accounts and business operations in electricity generation, distribution and marketing, plus natural gas supply and delivery. The new Exelon would:

- control over half of the generating capacity in the regional electricity market, PJM-East (See Figure ES-1);
- operate the nation’s largest power marketing business with 6.5 percent of national market share; and
- own 40 percent of firm natural gas supply capacity in the region stretching from Philadelphia to northern New Jersey—where gasfired generators often set the price of electricity.

• Because of its large size and wide scope, the decisions of the company would be extremely influential in determining the nature, quality, and price of electric service for customers across New Jersey, the Mid-Atlantic and the Midwest.

The takeover could threaten the viability of New Jersey’s electricity auction, potentially leading to higher rates.
• New Jersey depends on vigorous competition between electricity suppliers at a bulk auction to hold down electricity rates. However, the number of winners at the auction has declined almost two-thirds in the last two years, from 15 to six corporations. At the same time, the fixed price for electricity resulting from the auction has risen 19 percent. (See Figure ES-2).

• While other factors, including fuel costs, account for part of the cost increase, the percentage of supply contracts going to a single bidder has risen as well. In the PSE&G service territory, the maximum number of bids won by a single bidder increased from 21 percent in 2002 to 36 percent in 2004. This pattern follows a national trend of declining numbers of participants able to compete in the electricity market in a meaningful way.

• PSEG officials have stated publicly that PSEG has provided, directly or indirectly, at least 75 percent of the electricity supply at the auction.

• Further reducing the number of competitors would make New Jersey’s market look more like the dysfunctional power markets in some Midwestern states. For example:

- Illinois is working to set up a basic generation service auction modeled after the process in New Jersey. However, Exelon is the only generating company that appears prepared to participate in the auction for its affiliate utility, Commonwealth Edison—putting it in position to dominate the process.
- A large player in the Ohio power market recently refused to participate in an auction to supply generation service, causing the auction to fail outright. As a result, consumers in Toledo must now pay $2 billion in unscheduled “rate stabilization” fees over the next several years.
- With fewer effective competitors, New Jersey’s auction system could produce similarly disappointing results, with New Jersey consumers paying the price.

Exelon’s cost-cutting measures could harm the reliability of New Jersey’s electricity system and quality of service to consumers.
• Large holding companies like Exelon have a history of making cuts that lead to reduced reliability of the electricity system, driven by pressure to reduce costs in order to deliver larger returns to shareholders.

• Compared to PSEG, Exelon has a poor reliability and customer service record. o Exelon subsidiary ComEd operated the “worst performing circuit” in Illinois in 2002. In 2003, the company received the lowest customer satisfaction rating of all utilities in the state.

- Pennsylvania-based Exelon subsidiary PECO has steadily reduced investment in transmission system maintenance since the deregulation debate began in the mid-1990s. (See Figure ES- 3.) After takeover by Exelon in fall of 2000, PECO further reduced transmission maintenance investment by one-third.
- In 2003, PECO had the worst overall customer service satisfaction rating out of seven Pennsylvania electric utilities. In addition, PECO had the worst record of justified customer complaints in the state, 90 percent higher than the average utility.
- In contrast, PSE&G has the best reliability record in the state— fewer outages and service interruptions than any other New Jersey carrier in the last decade. PSE&G also has over 1,300 service employees, including a system of walk-in customer service centers, many of which are located in urban areas and where a high percentage of PSEG customers pay their bills.
- If Exelon chooses to cut investments in transmission maintenance and customer service—as it has in other states—it could reduce the reliability and quality of electric service in New Jersey.

Exelon is basing much of its business strategy on increasing the output of nuclear power plants, potentially risking public safety.
• Exelon is often praised by investor analysts for what is known as “The Exelon Way,” a system of operating nuclear power plants at higher rates of output, thus earning higher rates of return for shareholders. However, that additional productivity comes at great risk to public safety:

- “The Exelon Way” involves cutting on-site staff, firing safety whistleblowers and pushing nuclear reactor output to its limits. Although Exelon practices can result in productivity above 90 percent of capacity, serious damage to reactor systems can result.
- Exelon delays necessary repairs to coincide with planned shutdowns for refueling to minimize interruptions in power production and maintain high output. Despite the risks of operating damaged equipment, Exelon is driving a trend toward fewer scheduled shutdowns for maintenance and shorter refueling outages, leaving a much smaller margin for error when it comes to safety.
- Exelon’s business strategy also depends upon extending the licenses of aging nuclear power plants, like Oyster Creek in Ocean County, pushing 1960s-era technology 20 years beyond its intended life and increasing the amount of dangerous nuclear waste building up at reactor sites across New Jersey. Nuclear technology is inherently dangerous and extending reactor lifetimes could increase the risk of a catastrophic accident or terrorist attack. New Jersey regulators would lose the power to protect consumers from risky investment decisions.

• State regulators would lose the authority to protect consumers from risky non-utility business ventures. These ventures can put pressure on a company’s credit rating and lead to higher interest rates—which are then passed on to New Jersey families and businesses.

- After a potential takeover, PSEG would become part of a federally regulated holding company, subject to federal jurisdiction over its financial practices. New Jersey regulators would lose any significant power to regulate risk in PSEG’s investment decisions.
- To make matters worse, Congress recently repealed the Public Utility Holding Company Act. As a result, the federal government has far less ability to protect consumers from any risky investment decisions Exelon chooses to make.

Concessions will not solve the longterm problems inherent with the proposed takeover.

In order to win regulatory approval of its plan, Exelon is likely to propose deals or make concessions to federal and state regulators. Exelon has already revealed a proposal to divest a small amount of its assets to competitors and claimed that the economic efficiencies created by the deal will benefit consumers.

However, the proposed concessions would only sugarcoat the deeply rooted anti-competitive and anti-consumer problems inherent in the merger:

• Exelon’s proposed divestiture is far too small to mitigate the market power it will gain or the imbalance it will cause in the New Jersey and PJM wholesale energy markets. Exelon’s claims that the plan will eliminate market power concerns are based on:

- A mathematical concentration screen that fails to analyze possible effects on New Jersey’s unique auction system;
- A screen originally designed for more typical retail commodity markets like office supplies or rental cars—not a commodity with the unique attributes of electricity; and
- Arbitrary concentration thresholds that are not necessarily connected to effects in the marketplace or prices consumers must pay.

• In addition, Exelon has not formally proposed sharing any of the economic efficiencies it expects to create with ratepayers.

- Even if Exelon did share the savings, they would amount to only a token decrease in electricity costs for the average residential or commercial electricity consumer—on the order of 21 cents a month per household for the next four years.

New Jersey regulators should reject Exelon’s proposal.

Exelon’s takeover of PSEG can only proceed with approval from the New Jersey Board of Public Utilities (BPU). The BPU should reject the proposal on the grounds that it does not serve the public interest—and in fact could reduce competition, raise rates, reduce reliability and risk public safety.

Such a decision would not be without precedent. In the past year, Arizona and Oregon utility regulators stopped out-ofstate businesses from buying state-based energy companies because the deals did not provide any public benefit.

Similar action is warranted in this case. President Fox and the New Jersey Board of Public Utilities Commissioners should defend the interests of New Jersey’s electricity consumers and reject Exelon’s takeover of PSEG.