December 20, 2005 in Business

Utility merger to create biggest electricity firm

John Pain and Brad Foss Associated Press
 

Behind the deal

“The deal: FPL Group Inc. said it will buy Constellation Energy Group Inc. in an $11 billion stock deal that will create one of the nation’s biggest energy companies

“The players: Juno Beach, Fla.-based FPL Group, with operations nationwide, derives most of its revenue from its utility subsidiary, Florida Power & Light. Constellation Energy, based in Baltimore, operates Baltimore Gas and Electric, but gets most of its sales from nonregulated operations, including energy trading.

“The result: The combined company, to be called Constellation Energy, will have revenue of $27 billion and employ about 21,750 people. It will have the nation’s largest electric generation portfolio, with a capacity of more than 45,000 megawatts.

FPL Group Inc. and Constellation Energy Group Inc. promised Monday that combining their companies would benefit customers, but consumer advocates fear the opposite will occur.

FPL’s $11 billion acquisition of Constellation is the latest example of consolidation within the power industry, a trend that is expected to continue as companies seek to cut costs and balance their portfolios of regulated and unregulated businesses, while diversifying the regions they serve and the fuels they burn.

But as utilities expand, questions are being raised by consumer advocates about whether local regulators can effectively monitor interstate market activity. They also worry that homeowners and businesses will take on greater risk without sufficient improvements in service.

Executives with the two companies said the deal announced Monday would make both utilities more efficient and thereby help consumers by driving down costs. Any benefits to consumers wouldn’t come until perhaps 2009, said Lewis Hay, who will be chief executive of the combined company named Constellation Energy.

Hay said the primary benefits of the transaction would be to the unregulated power marketing subsidiaries of both companies, but that Florida customers would benefit from the more diverse mix of fuels the combined company would rely on to produce power, thanks to Constellation’s base of nuclear and coal plants. Also, Constellation would be an important backup power source for FPL customers in the event of a hurricane, he said.

The companies predicted the merger would generate $200 million to $250 million in annual savings.

“Whether any of those savings get passed through to the customers, I can’t really say,” said Harold McLean, who as Florida’s public counsel represents consumers in utility cases.

For example, FPL Group’s main subsidiary, Florida Power & Light, is a regulated utility without competition, so it’s highly unlikely that market pressures will drive rates down, he said.

FPL Group’s strong finances were partly the result of Florida Power & Light being able to charge customers for the estimated $1.2 billion in hurricane repair costs incurred the past two years, said Mike Twomey, president and founder of Florida Utility Watch, a consumer group.

Many Florida consumers have complained about having to pay for that, while FPL has raked in profits. FPL reported net income of $339 million in the third quarter, up from $320 million the year before.

Consumer advocates are closely watching for further consolidation in the utility market and its effect on the public after Congress’ repeal this summer of the Public Utility Holding Company Act of 1935.

The Depression-era reforms established rigid boundaries that confined utilities to regional markets and restricted investments by foreigners and companies from outside the power industry.

Utility executives and the Bush administration pushed to repeal the law, depicting it as an antiquated measure that retarded the industry’s growth and kept away investors who might help finance improvements in the power grid.

© Copyright 2005 Associated Press. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.


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