Dec 27 - Knight Ridder/Tribune Business News - Peter J. Howe The Boston Globe

When Constellation Energy Group Inc. and FPL Group Inc. confirmed their $11 billion merger plan last week, it marked the first new industry deal since Congress last summer repealed a 1935 law that had thwarted such mergers.

Coming on the heels of two earlier deals that are moving toward final approvals, a $9 billion merger of Duke Energy Corp. and Cinergy Corp. and Exelon Corp.'s $16 billion takeover of Public Service Enterprise Group Inc., the latest merger plan seemed to herald a long-awaited wave of US utility combinations.

But it's a wave that may take a while to reach New England, if it ever does, industry analysts say.

Unless and until major New England utilities such as NStar, National Grid USA, or Northeast Utilities merge with each other or with New York companies, analysts say, they're probably too small to be interesting takeover candidates for huge national players. Most of the deal making so far involves companies with market capitalizations of $10 billion to $30 billion, or 10 times as large as NStar's.

Because late-1990s deregulation turned most New England utilities into distribution-only companies whose profits are capped by state regulators, they might prove appealing only to a limited range of would-be acquirers, even if they pair off and bulk up.

FPL and Constellation are pairing up for very specific reasons, mainly involving how well their competitive power plant businesses and regulated-utility divisions match up.

"I don't know that the Constellation-FPL deal has huge implications for NStar or for National Grid," said Tim O'Brien, who runs the $340 million Evergreen Investments Utility and Telecommunications mutual fund in Boston. "That deal is really about the deregulated side of the business."

FPL has its corporate roots in Florida Power and Light, and Constellation in Baltimore Gas and Electric. Both have branched out into other industries and other parts of the country.

Their New England operations, in fact, epitomize the rationale behind the merger: Constellation's New Energy electric-marketing operation sells as much as 9,800 megawatts of electricity in New England to big industrial, corporate, and institutional customers. FPL owns or markets the power from generating stations with a total capacity of 3,650 megawatts, including the Seabrook nuclear generator in New Hampshire.

A combined FPL-Constellation would be able to sell electricity directly from plants to customers, increasing profits by cutting out middleman broker expenses and lining up more secure, long-term contracts for its power plants.

A key goal of the 1998 Massachusetts deregulation law was to get NStar and National Grid out of the power-plant business, making them strictly delivery companies.

"NStar is kind of a steady-Eddie business, highly regulated, as is NU," said John Dingle, managing director of the energy practice for Navigant Consulting Inc., a Chicago firm. "It's hard to imagine that there would be a company that would want to buy into New England strictly for that. There's no likely candidate."

"My sense is that there might be some more consolidation within this region, with National Grid being the aggressor," Dingle said. "You'd have to have a pretty significant intraregional roll-up strategy play out before you'd have an operation that would attract the interest" of a major utility holding company from another region.

National Grid spokeswoman Deborah Drew said: "We clearly have the desire to grow our business in the US, but we do not comment on mergers and acquisitions."

National Grid USA is a subsidiary of a London multinational that runs the transmission grid in England and Wales and operates electric assets around the world.

NStar spokeswoman Caroline Allen said that "from our perspective, nothing has changed" since the energy bill passed in August, but she declined to comment further.

O'Brien said one of the single biggest reasons an NStar takeover seems unlikely in the near future is that chief executive Thomas J. May is only 58 years old.

"NStar has long been rumored to be an acquisition target, but I haven't seen any indication that Tom May wants to retire," O'Brien said. Utility deals more often than not happen only when a chief executive is willing to step down, O'Brien said, because "the social issues in a merger are really, really hard. The stars have to be aligned to make a utility merger happen."