Fpl group and Constellation Energy Group promised Monday that combining their companies would benefit customers, but consumer advocates...
FPL Group and Constellation Energy Group 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 and they 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.
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“We understand the importance of customers and treating them well and keeping rates as low as possible,” he said during a conference call with reporters.
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.
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. The utility is Florida’s largest, with 4.2 million customers.
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 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.
But consumer activists fought to save the restrictions, arguing that repeal would pave the way for utilities to be devoured by giant companies that would be more interested in boosting profits than improving service.
By creating a company with reach in half the states of the country, FPL’s acquisition of Constellation makes it harder for state regulators to understand the power-purchase agreements and other transactions of each company’s regulated utility, and therefore makes it harder to determine the costs the utilities should legitimately be including when seeking rate increases, said Tyson Slocum, research director of energy programs at the consumer group Public Citizen.
In other words, the combined company could try to use the steady cash flow from its regulated business to subsidize the riskier activities associated with its unregulated unit, Slocum said.
“From my point of view, the only way to better supervise these emerging King Kongs would be through regulatory agencies that are also strengthening,” said Michael Shames, executive director of the San Diego-based Utility Consumers Action Network.
Shames said he is not opposed to utility mergers. “What I’d like to see is small utilities merge with other small utilities and become medium sized” so that they can better compete with larger players, he said.
The FPL-Constellation deal would be the first major utility combination since Congress repealed the utility act.