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CEG Faulted on Timing in an Election Year: Critics Say CEG Misread Election-Year Impact of Rate Rise

Posted on: Wednesday, 12 April 2006, 06:00 CDT

By Paul Adams, The Baltimore Sun

Apr. 12--From their choreographed handshakes to their matching dark suits and red ties, chief executives for Constellation Energy Group and Florida-based FPL Group Inc. gave all indications last Dec. 19 that they were in control of their destinies.

The two companies announced a proposed merger at the Waldorf Astoria in New York to a welcoming audience of industry analysts. And they put plenty in the deal to win the hearts of civic leaders and politicians back home - from a pledge to keep dual headquarters to a promise to maintain historic levels of philanthropic giving for 10 years.

But the whole thing came to the brink of collapse when Constellation was blindsided by public reaction to a proposed 72 percent rate increase at its regulated utility, BGE. The issue dominated the 90-day legislative session that ended shortly after midnight Monday.

Now management experts and others familiar with the deal say Constellation probably failed to anticipate how strongly its merger would factor into the political turmoil that the BGE rate increase would create in an election year, with the governor's race, among others, building up to November.

Such a miscue is uncharted territory for one of the state's largest corporations, which has spent hundreds of thousands of dollars in recent years in contributions to both political parties and has enjoyed friendly relations with Gov. Robert L. Ehrlich Jr.

"They did not have their ears to the ground, timing these two events together," said Peter Morici, a business professor at the University of Maryland. "This was not smart stuff."

Constellation says the timing of the merger was partly driven by the repeal last summer of a 70-year-old law that limited mergers in the power industry. That change was expected to spawn a number of mergers, and the company was in a hurry to pick its partner before all the best ones were taken.

And at the time the merger was announced, the company was still unsure how big the rate increase was going to be, making it difficult to gauge the political fallout.

"The problem is we just didn't have a number to hang our hat on," said Rob Gould, a spokesman for the company.

But with the legislative session over and a deal on a rate mitigation plan still in limbo, pundits and industry experts are looking back at Constellation's strategic playbook and wondering what went wrong.

The nation's largest marketer of power was riding high just a few months ago, when it announced an $11.4 billion merger that would position the company to be an end-player in the merger game. Constellation had a powerful story to tell - having added hundreds of high-paying jobs downtown and rocketing up the Fortune 500 list of U.S. corporations in just a few years. Its first-quarter profit climbed a better-than-expected 45 percent over the previous year.

But the first signs of trouble began to show early in the new year, when the company began preparing lawmakers and consumers for rising energy costs at its BGE subsidiary. The company had previously announced a plan to boost its funding for heating and energy assistance to consumers to $26 million, and it was slowly getting word out that electric rates could soar once rate caps were lifted at the end of June.

That's when the miscalculations began, crisis management experts say. In the rush to secure the merger of a lifetime, executives set aside worries about a rate increase everyone knew was coming.

"It strains credulity that they didn't know they'd have their biggest corporate opportunity fall at the same time as potentially the biggest crisis of their corporate life," said Levi Rabinowitz, president of Redzone News Management, a Baltimore crisis management firm. "They've created for themselves the 'rebuilding Baghdad' scenario here from a [public relations] standpoint."

In a March interview with The Sun, Constellation Chief Executive Officer Mayo A. Shattuck III conceded the timing of the deal was bad but that in the long run, the broader market forces affecting the company - and the benefits of the merger - were more pressing than the political debate over rates.

The wisdom of that decision would be put to the test as lawmakers passed a series of bills that would threaten the company's merger, seek hundreds of millions in concessions, replace a Public Service Commission perceived as overly business-friendly and damage its corporate credit rating.

"It doesn't make the Maryland legislature look very good in the coverage they're getting down here," said Christian Poindexter, Constellation's former chairman and chief executive, who spoke from his second home in Florida yesterday. "I guess everybody that's knowledgeable about this and my friends in the industry say this is just a typical election year in Maryland."

Some management experts said Constellation need have looked no further than CareFirst BlueCross BlueShield when trying to gauge the political climate.

CareFirst, the state's largest insurer, sought in 2001 to convert from nonprofit to for-profit and to sell the company for $1.3 billion. Drawing particular ire from legislators and others was a plan to pay a $9 million bonus and $30 million in deferred compensation, retirement benefits, severance pay and tax benefits to William L. Jews, the chief executive. The insurance commissioner vetoed the deal in 2003, saying the bonuses tainted the process. Legislators forced CareFirst to replace a majority of its board and to remain a nonprofit for at least five years.

Just as with CareFirst, lawmakers have criticized Shattuck for the tens of millions of dollars he will reap if the merger goes through. In early February, several senators were already holding hearings and drafting bills in a bid to protect consumers from higher rates. It was a debate that quickly grew beyond the company's control.

"In a situation like this, rational argument doesn't carry the day," said Mildred S. Myers, a professor of management communication at Carnegie Mellon University. "People always feel they're being gouged, and particularly, I think, utility companies are prime suspects in that regard. I've never known a state where there weren't accusations that the PSC was a tool of the industry rather than being interested in consumer protection."

At the end of the day, Myers said, Constellation could talk all day about how the merger will benefit consumers, or that the rate increase is not its fault. But people will focus only on the fact that their rates are going up and the CEO is getting millions of dollars to close the deal.

"I have spent lots of time with corporate executives who have to face the media, and there are some situations where there really isn't a whole lot you can do other than make sure the facts are out there," she said.

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Copyright (c) 2006, The Baltimore Sun

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NYSE:CEG, NYSE:FPL, Unknown:CF,

Source: The Baltimore Sun, Maryland

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