Originally published in Antitrust News & Notes February 2012
On December 21, 2011, the Department of Justice (DOJ) approved the merger between Exelon Corporation (Exelon) and Constellation Energy Group, Inc. (Constellation), subject to divestitures of certain assets. Exelon and Constellation are wholesale electricity generators that own 25,000 MW and 11,000 MW of generation capacity, respectively. In 2010, Exelon had annual revenue of $18.6 billion and Constellation had annual revenue of $14.3 billion. Both companies own significant generation capacity in the Pennsylvania, Jersey, Maryland Power Pool (PJM), which operates the wholesale power market in the Mid-Atlantic and several Midwestern states.
Because of inadequate high-voltage transmission capacity, the PJM market during many hours of the years, in effect, "breaks up" into smaller markets that need to rely on local generation to meet demand. Two of these markets are PJM Mid-Atlantic North and PJM Mid- Atlantic South, which together cover eastern Pennsylvania, eastern Maryland, Delaware, Washington, DC, and most of Virginia. During periods of high demand, there is often not enough transmission capacity to permit generators outside these areas to sell power to customers located in them. As a result, locally situated generators must run to meet demand. Due to these physical constraints, the DOJ defined PJM Mid-Atlantic North and PJM Mid-Atlantic South as the geographic markets of interest in this merger.
Constellation and Exelon both own generation plants in PJM Mid-Atlantic North and PJM Mid-Atlantic South. After the merger, they would own 28 percent of the capacity in PJM Mid-Atlantic North and 22 percent of the capacity in PJM Mid-Atlantic South. In addition, they would own a portfolio of low-cost "baseload" plants that run nearly all the time and high-cost "peaking" plants that operate at times of higher demand. Due to this combination, the highcost peaking plants can be used to raise market prices to increase the profits of the low-cost baseload plants. On this basis, the DOJ alleged that the merging parties' mix of assets would give them the ability and incentive to raise wholesale electricity prices.
To remedy the competitive concerns from the merger, the DOJ required the merging parties to divest three coalfired power plants located in Baltimore. These facilities must be sold to a DOJ-approved buyer within 150 days after the merger is consummated. The DOJ stated that these divestitures would eliminate the ability and incentive of the parties to raise wholesale power prices following the merger and preserve competition in the relevant markets.
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