Constellation Energy’s proposed merger with Calpine drew several protests at FERC on March 25 urging the commission to reject the deal, or at least to impose more stringent requirements than the companies initially proposed (EC25-43). 

Constellation is buying Calpine for $26.6 billion, with the latter’s current owners — Energy Capital Partners — having a minority share of less than 10% in the combined firm. It proposed selling 3,546 MW of Calpine’s natural gas plants in PJM, which is home to the biggest overlap of the two firm’s nationwide operations. (See Constellation, Calpine Propose Selling PJM Plants to Cut Market Power.) 

PJM’s Independent Market Monitor told FERC it should require specific structural and behavioral commitments on the combined firm, which would not burden the applicants, as they would preserve competition in the RTO’s markets. 

“Constellation has a unique role in PJM markets as a result of its ownership of 18,019 MW of nuclear capacity, 59.1% of all nuclear capacity in PJM,” the IMM said. “The nuclear units operate at a very high capacity factor, meaning that market prices at all hours directly affect Constellation’s net revenues from the energy and ancillary services markets. Calpine is one of the largest owners of natural gas-fired capacity in PJM, providing it with the ability to set prices in the PJM energy and ancillary services markets when it has market power.” 

To actually achieve lower market concentration, Calpine’s gas plants should not be sold to any of the existing pivotal suppliers in PJM. The Monitor suggested it should be sold to a firm that owns less than 3% of installed capacity. 

Constellation owns nuclear and some hydroelectric resources in the ComEd and PECO zones, the latter of which is on the low-priced side of the constraints pertaining to the Conastone transformer along the Pennsylvania-Maryland border. Those constraints impact prices around PJM. 

“Calpine has dispatchable resources in the area around these constraints,” the IMM said. “This means that the transaction will cause Constellation to have greater ability to increase prices in the energy market to the benefit of its large, high-capacity factor generators. This increase in market power can only be mitigated through the use of the behavioral conditions proposed by the Market Monitor.” 

Constellation already has several behavioral agreements with the IMM; those also should apply to all of the new generation it is buying in this deal, the Monitor argued. It filed a report that includes a long list of behavioral requirements, including 18-month notices before retiring a plant, limiting energy offer markups to $1/MWh, self-scheduling nuclear plants at their maximum output and bidding restrictions in the energy market. 

“Additional provisions are needed, given changes in the PJM market rules to address potential withholding of capacity market offers and co-located load,” the IMM said. “Given Constellation’s market power in PJM, as the largest single provider of capacity and energy, the behavioral rules would ensure competitive energy market offers and would prevent physical withholding of Constellation’s resources.” 

Even though ECP will own less than 10% of the combined firm (the actual percentage has not been revealed), the Monitor said that could bring up anticompetitive issues, as the firm owns other resources in PJM. 

“The best structural option would be to not allow ECP to own any part of Constellation following the transaction,” the Monitor said. “The best behavioral option would be for ECP to sign a binding document preventing ECP from knowledge of or any input into any Constellation decisions related to Constellation’s assets.” 

Public Citizen, PennFuture and the Clean Air Council filed a joint protest of the deal, saying FERC should either block it or impose significant structural and behavioral conditions. They argued the companies failed to prove the case that the merger is in the public interest. 

“They do not address the public’s lost benefit of their competition,” they said. “They are silent on the transaction’s likely exacerbation of Constellation’s ability, incentive and propensity to exercise market power in PJM by withholding supply in PJM energy markets and by withdrawing supply entirely from PJM wholesale markets.” 

While the two firms own substantial generation, they also are large retailers in the states that allow shopping for electricity, the groups said. FERC needs to pay attention to how the deal will impact those markets, they argued. 

The Pennsylvania Office of Consumer Advocate said the deal will have a negative impact on the state’s retail market, arguing it would increase concentration in the commercial and industrial sector by nearly 500 points on the Herfindahl-Hirschman Index, when FERC triggers mitigation measures for an increase of just 100 points. Constellation serves 31.7% of the C&I market as the leading competitor, while fourth-place Calpine serves 7.7%. 

Most of Pennsylvania’s mass market residential customers are served on default service auctions, and the deal will combine two of the biggest bidders. The consumer advocate noted the auctions are confidential and it cannot determine how much, if at all, the deal would impact default service. 

“Though the concern about adverse impacts on competition in the market for default service auctions in Pennsylvania is conceptual rather than empirical due to the unavailability of the data required to conduct a thorough analysis of this issue, the potential for large numbers of residential and small commercial customers to be detrimentally affected exists,” the Pennsylvania consumer advocate said. “This determination will hinge on the degree to which Constellation and Calpine have historically participated in these solicitations and the overall degree of market participation.” 

The Maryland Office of People’s Counsel filed its own protest, urging FERC to reject the application or hold more hearings because Constellation and Calpine failed to justify the deal. 

“Even with the divestiture, the proposed transaction in this matter poses specific market power concerns because Calpine and Constellation’s respective generation assets are complementary rather than identical,” the OPC said. “The transaction combines Calpine’s higher-marginal-cost, fossil fuel-fired generating units, providing Constellation the ability to withhold power post-merger for relatively little loss in profits (its ‘ability’ units), with Constellation’s lower-marginal-cost nuclear plants, which would benefit from higher clearing prices and therefore increase Constellation’s incentive to withhold power (its ‘incentive’ units).”