PSC's review of Constellation deal: Still illegal
I have received a fair amount of email about last week's column that said:
You don't need to be a lawyer to understand how Gov. Martin O'Malley's Public Service Commission is flouting the law. Rarely is the difference so bright between what is permitted and what is perpetrated.The law, signed by O'Malley in April 2008, lets the commission review deals by electric utility owners only if a transaction would give somebody at least a fifth of the shares or a fifth of the board seats at the owner corporation. The red, octagonal "STOP" sign at the end of my street is a similar example of clear legal language.
But the commission claims the power to reject Electricite de France's plan to invest in BGE parent Constellation Energy even though the French company would get only one out of more than 10 board seats and owns fewer than 10 percent of the shares. The decision demonstrates stunning bad faith by Maryland as well as O'Malley's increasing desperation to be seen as keeping campaign promises to lower electric prices.
Readers want more legal background. Here is the full language of the law passed last year by the General Assembly. Here are the relevant paragraphs:
(2) FOR THE PURPOSES OF THIS SUBSECTION, A PERSON MAY NOT BE CONSIDERED TO HAVE ACQUIRED, DIRECTLY OR INDIRECTLY, THE POWER TO EXERCISE ANY SUBSTANTIAL INFLUENCE OVER THE POLICIES AND ACTIONS OF A GAS AND ELECTRIC COMPANY IF THE PERSON: (I) AFTER ANY ACQUISITION OF VOTING INTERESTS OF A COMPANY THAT OWNS OR CONTROLS A GAS AND ELECTRIC COMPANY, DIRECTLY OR INDIRECTLY, OWNS, CONTROLS, OR HAS THE RIGHT TO VOTE, OR DIRECT THE VOTING OF, NOT MORE THAN 20% OF THE OUTSTANDING VOTING INTERESTS OF A COMPANY THAT OWNS OR CONTROLS A GAS AND ELECTRIC COMPANY; AND (II) DOES NOT HAVE THE RIGHT TO DESIGNATE MORE THAN 20% OF THE BOARD OF DIRECTORS OR OTHER GOVERNING BODY OF A COMPANY THAT OWNS OR CONTROLS A GAS AND ELECTRIC COMPANY.
Here is the full text of the commission's order that begins:
In this Order, the Public Service Commission finds that Electricité de France International, SA (“EDF”)1 would, upon completing a proposed transaction with Constellation Energy Group, Inc. (“CEG”), “acquire, directly or indirectly, the power to exercise … substantial influence over the policies and actions”2 of CEG’s wholly-owned subsidiary, Baltimore Gas and Electric Company (“BGE”).
Here is how the commission lamely explains its decision to take jurisdiction even though the law says it lacks it:
CEG argues that the “safe harbor” ends our review of this transaction because EDF is acquiring neither voting interests that would take its holdings above 20% nor the right to designate more than 20% of the CEG Board of Directors. We find that the plain language of (e)(2) compels exactly the opposite conclusion: because EDF will, in the proposed transaction, acquire rights and assets other than voting interests in CEG, the “safe harbor” does not and cannot apply. Once a proposed transaction includes elements other than acquisition of stock and board designation rights, it no longer is eligible for the (e)(2) exception.
Stock ownership and board votes are the alpha and omega of substantial control. All corporate law is predicated on the notion that the people who own companies and the boards that supervise them are the controlling entities. This PSC sentence -- "Once a proposed transaction includes elements other than acquisition of stock and board designation rights, it no longer is eligible for the (e)(2) exception." -- is Orwellian in its casual assertion of omnipotence. By such logic, if Constellation wanted to give an ice cream party for EDF or another business partner, the PSC could block the deal.
Judge Berger's dismissal last week of Constellation's challenge to the PSC's authority does nothing to change this argument. He didn't rule on the merits of the case.
Comments
I would have thought you would drop this point after the judge's ruling last week, but you decided that another article was needed to speak out against the PSC. It is hard for me to believe that any unbiased analyst would advocate that the old BGE team should proceed with this transaction without PSC oversight. You, however, appear to fully support BGE, do not mention the problems in their track record and continue to be critical of PSC involvement. I'm glad that the courts, so far, do not appear to share your view. It seems to me that their decision serves the interest of the MD consumer.
Posted by: bev | July 6, 2009 12:36 PM
That's entirely the point...the MD consumer is not being served by the PSC, either. Instead of cultivating an environment where business could flourish, specifically, Constellation (the "old BG&E"), MD government has targeted Constellation as an effigy for any failure related to MD's energy future. Case in point: the Maryland government negotiated a freeze in electricity rates in 1999, certainly a dice roll on their part, but that's the course which the Maryland government chose to do (not Constellation). When that rate freeze ended, did the news report about the money that Constellation lost during that period? On the contrary, the news was dominated by the rate "jump" (which merely brought it to parity with current costs), and provided O'Malley with another platform to be the "knight in shining armor" to save the MD citizens from the evil corporate bully. Seriously, bashing Constellation is easy to do if you want to disregard the truth. Constellation was set to merge with Pepco in the late nineties...cancelled by PSC. Constellation was set to merge with FP&L (Florida Power and Light)...cancelled by PSC. Constellation is set to merge with EDF...trying to be cancelled by PSC. In light of the recent economic pitfalls of the last year, there is some speculation that had one of the prior mergers been allowed to take place, Constellation may have been able to ride out the credit crunch of 2008. Yet in light of evidence to the contrary, the "trumpets of righteousness" ring out with how unfair Constellation is to consumers. There was even recent flak about Constellation's decision to terminate electrical service to customers who had made no effort to pay their bills. Editorially, if you didn't make payments on your vehicle for several months, the lending institution makes efforts to recover the assett and recover their costs. Make some effort to learn about how electricity is made and distributed to the consumer, vice using Constellation as a pariah.
Posted by: Andy | July 6, 2009 1:34 PM
Bev - Jay's point is that the law needs to be followed. All the parties knew what the safe harbor agreement meant when they signed it. This is how tyranny begins. You're OK with flouting the law when it's directed at someone or something you don't like. How about when the State of Maryland decides they don't like you or your company?
As Jay says, the judge ruled on a point of law, specifically if an appeal could be made to a regulatory process that was not yet complete - he said no. He did not rule on whether the PSC had jurisdiction. This is about elective politics. I see no mention by any of the principals arguing against Constellation and BGE (Pipkin, Rosapepe, O'Malley, Raskin, Brochin) about other utility customers in the state (Pepco, Allegheny, Delmarva, SMECO) despite the fact that those utilities' rates are the same and in some cases higher than BGE. They go after BGE because that's where the votes are. Pepco serves Montgomery and PG (solid Democratic voting blocks that are pre-determined), Delmarva is on the eastern shore and those votes don't matter, but Baltimore County is the swing county. They spin fanciful stories about BGE as Constellation's cash cow, whatever that means (actually, I think Constellation is O'Malley's cash cow)and the CEO's compensation (a red herring if there ever was one), all to turn BGE's customers (voters) toward O'Malley as fighter for the common man. Great politics but unfortunately real people get hurt. I find our governor to be one of the most irresponsible politicians I have ever seen. Clearly the guy is in it for no one other than himself.
Posted by: Big Mike | July 7, 2009 6:32 PM