Maryland PSC Adds Market Power Conditions in Approving Exelon-Constellation Merger

The Maryland PSC conditionally approved the merger of Exelon and Constellation Energy on Friday, with additional provisions relating to market power.

The Commission made commitments offered by the applicants, included in settlements with various intervenors, conditions of the merger, including the divestiture of the Brandon Shores, CP Crane, and HA Wagner generating plants. The accepted market power conditions are more fully discussed in our prior story

In addition to these measures, the PSC offered additional conditions to address market power.

The applicants' settlement with the PJM Independent Market Monitor contained certain behavioral conditions regarding plant operations and bidding, to be in effect for a 10-year term.

The PSC rejected the automatic 10-year sunset, and ordered that the terms of the IMM Settlement shall expire in 10 years, provided that the Commission may extend the terms of the IMM Settlement if, after an evidentiary hearing addressing market conditions, the Commission determines that the expiration of the behavioral remedies in the IMM Settlement will, through the applicants' increased ability to exercise market power, pose a significant risk of harm to Maryland ratepayers.

The PSC requested that the IMM provide to the Commission within the ninth year of the IMM Settlement an evaluation of the effectiveness of the remedies still in place, and the impact of the expiration of the IMM Settlement on the ability of the applicants to exercise market power in the markets controlled by the IMM Settlement.

The Commission said that this measure is necessary to address any market power concerns which may exist in 10 years time, due to changes in the market. The PSC noted that it would not independently have jurisdiction to order additional divestiture in ten years if market power concerns reemerge after the expiration of the behavioral conditions of the IMM Settlement. "That outcome leaves open the possibility that the Applicants could exercise market power after the expiration of the IMM Settlement," the PSC noted.

Additionally, as much of the market power mitigation measures are premised on the applicants' continued membership in PJM, the PSC clarified that, "the Applicants' continued membership in PJM is an implied commitment in the IMM Settlement, and thus a condition of approval."

As previously reported, Exelon has agreed to build 285 MW to 300 MW (nameplate capacity) of new generation in Maryland within the ten-year period following consummation of the merger. The PSC approved the commitment as a condition of the merger, and particulars concerning the type and location of such generation, as well as the cost recovery mechanism, were covered in our prior story

The PSC found that the new gas-fired generation included in the settlement serves as a structural remedy to the risk that the divested Crane and Wagner units will be retired by their new owners. Additionally, the PSC agreed that the new generation in no way represents an incremental exercise of market power within the framework established by the DOJ/FTC Horizontal Merger Guidelines. "[W]e find that the introduction of new generation to the market adds a valuable mitigating effect," the PSC added, when taking into account the behavioral conditions imposed.

While finding that the conditions adequately addressed market power, the PSC took the opportunity to emphasize the IMM's previously stated conclusion that, "market power is endemic to the capacity market in PJM [because] a small number of owners control a large portion of total capacity."