State, Constellation reach truce on rates

The years-long dispute over whether consumers were shortchanged in a 1999 deal to deregulate the power industry ended yesterday with Constellation Energy Group and Gov. Martin O'Malley concluding that neither side could afford to keep fighting.

The two sides announced a settlement yesterday that allows both to claim a measure of victory, while avoiding a prolonged legal battle that could have distracted from efforts to resolve a looming statewide energy shortfall.

O'Malley takes credit for securing rebates and bill credits totaling more than $533 million for Baltimore Gas and Electric's 1.1 million residential customers, who this year will pay 85 percent more for electricity than in 2005. BGE customers also avoid $1.5 billion they might have been liable for to shut down the two Calvert Cliffs nuclear reactors.

O'Malley said yesterday that there is no "magic wand" that utility regulators and lawmakers can wave to bring down the price of natural gas and other fuels used to make electricity.

"We have huge challenges ahead," said O'Malley, a Democrat. "But I believe that some of the contentious and divisive issues of the past are now behind us with this agreement."

For Constellation, the deal means freedom from a political quagmire that cost it a $12 billion merger with a Florida company in 2006 and has dragged the value of its shares down at a time when it needs capital for continued growth. Among other things, lawmakers pledged to stop investigations into the $975 million in so-called "stranded costs" customers paid to compensate Constellation for taking over BGE's power plants.

Lawmakers also will remove a restriction preventing other companies from acquiring more than 10 percent of Constellation's shares without regulatory approval. The cap will rise to 20 percent, making it easier for Constellation to raise capital to pay for nuclear plants and other projects.

"All parties gain meaningfully in this carefully crafted settlement, and the overarching value is a return to regulatory stability and normalcy," Mayo A. Shattuck III, Constellation's chief executive, said in a statement.

Despite the deal's sizable price tag, news of yesterday's settlement sent the company's stock up 3.3 percent to $90.23 - a sign of how much Wall Street punished the company for its battle with lawmakers. The shares touched a high of $107.97 not long before the latest dispute started.

Industry analysts say Constellation needed to make peace with lawmakers if it is to invest up to $5 billion in a new nuclear reactor and other generation projects in Maryland and elsewhere.

"In this kind of environment, the market hates uncertainty," said Paul Patterson, an analyst with Glenrock Associates, referring to the settlement.

The stakes were equally high for O'Malley, who could ill afford to be at war with the state's largest energy producer at a time when Maryland needs more electricity. Utility regulators estimate Maryland faces potential blackouts in three years unless new power plants or transmission lines are built to increase supply.

Senate President Thomas V. Mike Miller said negotiators worked "around the clock" for two weeks and that the atmosphere was "very testy, with much anger on both sides." In the end, he said, they were able to reach a "fair and equitable" agreement.

Miller and other lawmakers said the Public Service Commission, which regulates utilities, will continue to study the possibility of re-regulating the energy industry, as the General Assembly ordered it to do last year. But he said Constellation might avoid some scrutiny by regulators, who were not given subpoena power, which lawmakers had threatened to grant to the PSC.

The General Assembly must ratify most elements of the settlement, and legislative leaders said they plan to have a bill ready for passage before the session ends in a little more than a week.

Origins of the fight date to early 2006, when the transition to a deregulated power market sent BGE rates up 72 percent. The resulting political fallout scuttled Constellation's merger with FPL Group Inc. and led to a series of legislative and regulatory actions aimed at mitigating the rate increase. Those efforts peaked in January when the PSC issued a report deconstructing the 1999 deregulation deal, concluding it was bad for consumers.

Angry Constellation executives, who argued the 1999 deal was agreed to by both sides, responded by suing the state to recover $386 million in credits given to BGE customers in legislation passed last year. O'Malley countersued but later called Shattuck to discuss a "global" settlement.

Some lawmakers were skeptical of the settlement and whether state negotiators got the best deal for consumers. Sen. E.J. Pipkin, an Eastern Shore Republican, said he would examine any costs stemming from the 1999 deal for which ratepayers would still be on the hook.

But Sen. Thomas M. Middleton, a Charles County Democrat who is chairman of the Finance Committee, said that disputes over the 1999 deal, which some have said was lopsided in favor of Constellation, would be "put to rest." He also said Constellation's proposal to build a nuclear power plant in Maryland would help the state address an impending energy crisis with clean, cheap electricity.

"Now [Constellation is] in a better position to go to the market to borrow the money that they need in order to build this plant and other plants," Middleton said.

Del. Brian K. McHale, a Baltimore Democrat, said the most significant part of the settlement is Constellation's concession to accept financial liability for shutting down Calvert Cliffs by 2036.

"That liability is now going to be removed," said McHale, who opposed the 1999 legislation that deregulated the industry and allowed BGE to build decommissioning costs into utility rates.

Del. Warren E. Miller, a Howard County Republican, called the $170 per-household refund "better than nothing," but he discounted the settlement as a political victory for O'Malley.

"I think he still has to explain to ratepayers why there was a 72 percent increase" in utility rates, Miller said.

Some consumers were unimpressed by the settlement. Elizabeth Barrett of Annapolis said it was small compared with the increase in rates.

"My bill has gone sky high," said Barrett, 67, a children's choral director. "A hundred seventy dollars does not even make the difference in one month's bill for me."

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