After much speculation and months of being caught up in a political battle over rising electricity rates in Maryland, FPL Group (Juno Beach, Florida, U.S.) and Constellation Energy (Baltimore, Maryland, U.S.) have formally terminated their merger agreement that was pending before the Maryland Public Service Commission (PSC), the Federal Energy Regulatory Commission and other agencies. The termination of the US$11 billion merger was announced on Oct. 26, 2006, less than one year after the merger agreement was made public in December 2005.

During that time frame, Constellation's Baltimore Gas & Electric (BGE) company's mandated six-year rate freeze expired, and BGE announced residential rates would increase by 72%. This in turn caused a frenzy among state legislators, resulting in the Maryland PSC being fired. An appeals court later overturned the law firing the PSC, but left in a provision prohibiting the PSC from approving the merger.

Still fighting for the possibility of a merger as recently as Oct. 4, 2006, FPL Group filed a lawsuit against the state and the Maryland PSC to force a timely review of its proposed merger with Constellation Energy Group and clarification on who may rule on the transaction.

But in the end, the merger agreement was called off, with both sides agreeing neither should pay a transaction fee for the breakup. “As we considered the situation in Maryland, the risks and uncertainties were too significant to overcome,” cited Constellation CEO Mayo Shattuck in a prepared statement. Both Constellation Energy and FPL Group declined interviews due to a confidentiality agreement regarding the merger.

Despite the recent failure of the Constellation Energy-FPL and Exelon-Public Service Energy Group mergers, Rick Harden, a partner with Hunton & Williams (New York, New York, U.S.) who focuses on the legal aspects of corporate finance and mergers and acquisitions primarily in the energy industry, is optimistic that utility mergers will get done, “but investors will choose their states very carefully.” For instance, he says, “States in which there has not been restructuring … are not going to be as afraid of mergers — for one thing because they don't have these rate freezes [that restructured states do] that will suddenly unleash a demand for rate increases. Restructured states don't have as much control over the utilities as they used to … and the more of that control they lose, the more nervous mergers make them.”

As to the kinds of mergers that will occur, Harden predicts they will be between geographically “far-flung” utilities. “My guess is that nonrestructured states where the companies are not close together would be easier [to gain approval] from a state point of view, assuming you could show efficiencies in those mergers.”