At the short end of the stick are clearly Public Service shareholders. Their stock had been tracking Exelon’s rising share price for some months. Recent valuations of nearly three times book value, 19 times trailing 12-month earnings and a yield of little more than 3 percent would be expensive even for the highest quality electric utility. And the company has been anything but that in recent years.

Without Exelon, Public Service is still likely to get stronger over time. Management has been steadily improving service and the performance of its power plants, while trimming debt and unloading a portfolio of underperforming non-core assets in the US and abroad.

The company also continues to enjoy a BBB credit rating and the dividend is well protected with a payout ratio of 64.8 percent.

In addition, it appears Exelon will continue to manage the nuclear plants the two companies own jointly, and it could conceivably make a bid for them. That should hold down nuclear plant operating risk, which has been a problem for Public Service over the years.

On the other hand, there’s still a lot of work to do before Public Service can become a real powerhouse on its own, as it definitely would have been as part of Exelon. And despite management’s optimistic statements, there are now considerable question marks about how New Jersey regulators will set rates, given the harsh conditions they attempted to impose on the merger.

As a result, the shares don’t deserve anything close to their current valuation. That was the clear message from their nearly 10 percent drop in the after market on Thursday evening, which followed the two companies’ post-market-close announcement that they were abandoning the deal.

Exelon shares, on the other hand, actually rallied slightly in the after market yesterday, and continue to gain ground today. Wall Street viewed management’s decision to walk away as an affirmation of its discipline and determination not to pay so much for Public Service that it couldn’t make a profit running its assets. In an age where many executives will pursue a deal at any cost--a larger entity means a bigger salary, for one thing--Exelon’s bosses acted in the best interests of shareholders and said no thanks.

On its own, Exelon remains one of the strongest companies in the power sector. Even without Public Service, its fleet of nuclear plants is the largest and most profitable in the country, and in prime position to capitalize on recovering power prices in its Northeast and Midwest core markets. And despite the recent plunge in natural gas prices from post-Katrina highs, its nukes remain the most competitive baseload plants in the country.

Management continues to be focused on growing its business by adding assets through acquisitions. But there’s no shortage of potential targets, from whole utilities to individual assets, namely nuclear plants. And by walking away from what would have been a bad deal with Public Service, it’s kept its powder dry and ready to deploy for moves that will indeed make shareholders money.

WIDER IMPLICATIONS

The merger didn’t fail for lack of trying on the part of the would-be partners. Exelon and Public Service had already gained the thumbs up from Wall Street as well as all needed regulatory approvals, but one. Unfortunately, that was easily the most important one: Public Service’s home state of New Jersey.

From the beginning, the proceeding in the Garden State was contentious. Several groups took issue from the beginning, pushing the New Jersey legislature to pass legislation to block the merger.

The companies had originally expected a final ruling and a close to their merger in the first quarter of this year. Instead, the Public Utilities Commission dragged out the proceedings for months, always promising a deal that never materialized.

Finally, as the breakup fee expired, Exelon made what it called a last, best offer of rate cuts and asset sales to mitigate market power concerns. Regulators countered with their far more wide-reaching proposal. In the end, the two sides couldn’t reach a deal that made economic sense for the utilities. And finally after several statements warning of the possibility in recent weeks, Exelon called the whole thing off.

One result of the failure of this deal is it will likely discourage merger activity involving New Jersey utilities, barring a major change in the state government and utility regulation. The state overplayed its hand with its demands, and it wound up hurting New Jerseyans who hold Public Service shares. But for many politicians, it was more important to have the electric company headquartered in the state than to become more efficient. That kind of thinking will always doom mergers.

It also likely marks the end--at least temporarily--of the wave of “dominance” mergers of recent years in the utility sector. Six of the seven of these mega-deals that I profiled in mid-year 2005 in Utility Forecaster were able to close, including DUKE ENERGY’S (NYSE: DUK) takeover of CINERGY. All have created significantly more powerful and adept companies.

With Exelon/Public Service Enterprise Group failing, there are still three prospective dominance deals in progress: AT&T’s (NYSE: T) takeover of BELLSOUTH (NYSE: BLS) in telecom, and FPL GROUP’S (NYSE:

FPL) attempted union with CONSTELLATION ENERGY (NYSE: CEG) and NATIONAL GRID’S (NYSE: NGG) proposed takeover of KEYSPAN ENERGY (NYSE: KSE).

All three are potentially industry transforming if they should come off, but each is also being severely challenged. AT&T/BellSouth may win approval from the Federal Communications Commission by the end of October. But the pair still needs the OK from many states and the merger could also be threatened by an ongoing court review of the long-completed AT&T/SBC deal. The pair has managed to stay out of the limelight in recent months, but the going is bound to get more difficult the closer they get to consummation.

As for FPL/Constellation, the big challenge lies in Maryland, home to Constellation’s utility unit. The state is in the midst of a bitterly contested battle between the incumbent Republican governor and his Democratic challenger, which comes on the heels of a virtual war between the governor and the Democratic-controlled legislature.

Earlier this year, legislators sparred with the governor over a proposed 70 percent rate increase for Constellation, which was an attempt to catch rates up to costs after a 10-year rate freeze. The battle spilled over to attempts to place conditions on the proposed merger with FPL, as well as the governor’s authority to appoint regulators.

At this point, FPL and Constellation have suspended their integration activities, pending how these issues will be resolved.

And it’s a safe bet they won’t be settled until after November 7, if then. If the governor wins re-election and Republicans avoid a wipeout in the legislature, it’s possible a compromise will be reached that will allow the deal to go through. Alternatively, Democrats may feel generous if they take back total control of the state. But until an agreement is reached, this deal too will be endangered.

National Grid/KeySpan, meanwhile, faces only one major regulatory challenge, New York State. The Empire State has generally been a good place for utilities to operate over the past few years.

Unfortunately, this year ENERGYEAST (NYSE: EAS) and CH ENERGY (NYSE:CHG) have each received less-than-constructive rate decisions from regulators. Meanwhile, the KeySpan deal has attracted opposition from unions and Senator Hillary Clinton has advised state regulators to closely scrutinize the deal, charging Grid with a spotty safety record.

Grid has sharply improved performance of the gas and electric distribution companies it’s been acquiring in the Northeast in recent years. One of these is Niagara Mohawk Power, a real basket case until Grid took it over. That fact may not matter after November 7, with Democrats likely to take back the governor’s mansion. The deal still looks likely to get done, but again these are risks.

In light of the difficulties dominance mergers in the works are facing, companies are likely to think twice before they propose another. Exceptions could be utilities that operate in more pro-business regions like the Southeast. SOUTHERN COMPANY (NYSE: SO) and PROGRESS ENERGY (NYSE: PGN), for example, have been increasingly cooperating in power generation and sales. But for the most part, activity between giants is likely to be scarce.

To be sure, merger activity will continue in the industry, just as it has for the century-plus since the utility sector came into being. But we’re far more likely to see deals for the myriad small utilities still left, rather than more big deals.

Several fry are currently in the process of being bought out, including CASCADE NATURAL GAS (NYSE: CGC) by MDU RESOURCES (NYSE:MDU), GREEN MOUNTAIN POWER (NYSE: GMP) by a Canadian company and NORTHWESTERN CORP (NSDQ: NWEC) by Australia’s BABCOCK & BROWN. None of these deals--or the others in progress--require the approval of multiple, tough states and they’re unlikely to draw any scrutiny on the federal level, particularly with last year’s repeal of the 1935 Public Utility Holding Company Act and a generally laissez faire Federal Energy Regulatory Commission.

In short, deals between fry are much easier to get done. Approvals for all of the above deals should be won well inside of a year. That makes them a far more predictable way for acquirers to add to future earnings. And shareholders of the targets can capture sizeable near-term capital gains as well, since these deals almost always go off at premiums to pre-deal prices.

Interest rates are certain to be volatile over the next several months as investors sort out whether the economy is slowing and/or inflation is accelerating. Energy prices will continue to be all over the map. Come what may, however, utility takeover targets should continue to perform, just as they’ve consistently done since the late 19th century.

Remember to choose only companies that you wouldn’t mind owning, even if no deal appears for some months or even years. It’s the attractive utilities that will command the best premiums. And no matter how long it takes executives of acquirers to recognize their value, you’ll pick up steady gains as well as growing dividends while you wait. For more on takeovers, see the upcoming October Utility Forecaster, which will be available online as of Saturday, September 29.