Top executives of Constellation Energy Group and Exelon Corp. faced questions about reliability, local management of Baltimore Gas and Electric, and corporate governance Monday at the start of what is expected to be an exhaustive regulatory review of the proposed $7.9 billion merger of the two energy giants.
Constellation Chief Executive Officer and Chairman Mayo A. Shattuck III and Exelon Chief Operating Officer Christopher M. Crane took the stand together during daylong questioning by an attorney representing the state and the Maryland Energy Administration.
The Maryland Public Service Commission, which has the power to veto the merger, is charged with ensuring that the transaction is in the public interest and would benefit ratepayers.
In announcing the proposed merger in April, Exelon and Constellation officials offered a $250 million incentive package, including a one-time $100 rate credit for each of BGE's 1.1 million residential customers, as well as contributions to the state's green energy goals.
The Maryland Energy Administration, consumer advocates and others say Exelon and Constellation need to provide additional protections and concessions to make the deal more palatable.
Shattuck defended the proposed merger.
Constellation could exist as an independent company, Shattuck said in response to a question about whether issues related to the company's liquidity crisis three years ago led to the merger plan.
But, he said, the merger is an "option that preserves and creates greater value over time."
Scott H. Strauss, the attorney representing the state and the Maryland Energy Administration, directed many questions to Crane, who was asked to explain Exelon's reporting structure and spending priorities and how it planned to oversee BGE, Constellation's regulated utility. Crane would be the chief executive officer of the combined company.
In particular, Strauss questioned whether BGE would be protected if Exelon filed for bankruptcy. Crane responded that BGE would be safe because of measures implemented two years ago to protect the utility from the parent's financial problems.
Crane also maintained that BGE would be a locally managed, stand-alone company. When asked whether BGE would be expected to meet goals established by the corporate parent, such as those related to reliability and return on equity, Crane answered in the affirmative.
In particular, Exelon expects its two other utilities, in Philadelphia and Chicago, to place in the top quartile of industry benchmarks when it comes to reliability standards, Crane said.
Crane said Exelon had reduced costs while improving reliability at its two utilities.
Shattuck, however, said increasing reliability usually means an increase in spending.
Crane — noting that this was an area in which he and Shattuck disagreed — declined to commit to increasing BGE's reliability while maintaining costs, saying, "I'm not here to negotiate today."
Strauss also questioned Crane about Exelon's commitment to its utility customers, citing minutes of an August 2010 executive committee meeting in which Exelon's chief executive officer, John Rowe, said "value to shareholders is our real objective."
According to the minutes of the meeting, if forced to choose, the company would cut operating and maintenance spending rather than the dividend.
Crane responded that safety and reliability were the company's top priorities, noting that the meeting discussions were related to a particular analysis of financial "stress" situations. Crane also said the operating and maintenance budget was broken down into different levels, with discretionary spending such as travel and sports tickets the first level to be cut.
Strauss also grilled the two executives about their roles under the combined company.