BGE offers city $100M for underground system

BGE threatens rate surcharge if Baltimore raises rates to use underground system.

Baltimore Gas and Electric Co. is attempting to buy the city's vast underground conduit system for $100 million, according to documents obtained by The Baltimore Sun.

BGE's offer comes as the city is considering tripling the rate it charges the utility and other businesses that use the underground ducts to carry power and telecommunications lines — a move that could increase revenue from about $8 million a year to $24 million a year.

Currently, the city makes enough money off its conduit system only to pay for its upkeep. But a large rate increase could provide money for other city services, officials argue.

BGE officials, the largest users of the conduit system, say that if the city doesn't sell or agree to a long-term lease, they will seek an extra electricity charge for city residents of $8 a month to cover the costs. Such a request would have to go before the state's Public Service Commission.

The negotiations have involved top officials from both BGE and the city, but have not reached the desk of Mayor Stephanie Rawlings-Blake, said her spokesman Kevin Harris.

"The mayor has not been presented with any policy to review and consider," Harris said. "At this point it would be premature for us to speculate or comment."

BGE spokesman Aaron Koos also declined to discuss the negotiations.

"We are in discussions with the city on a variety of matters to improve the customer experience, by enhancing reliability and safety while controlling costs," he said in an email. "It would be premature to discuss any specifics at this time."

Documents obtained by The Sun show BGE's chief financial officer, David M. Vahos, and vice president Alexander G. Nunez have been discussing the matter with the mayor's chief of staff, Kaliope Parthemos, and transportation director William Johnson.

At issue is the use of 741 miles of conduit ducts first built in the 1890s under the streets, lanes, and alleys of Baltimore. In 1937, The Sun called it "easily the largest municipally owned conduit system in the United States." The system, which carries wires for electricity, telephone service, fiber optics and street and traffic lights, is accessed from more than 14,000 manholes and stretches throughout most of the city, except its outskirts.

BGE and other companies, such as Comcast, pay the city for access to the system at a cost of less than $1 per foot of power cable.

For years, some city officials and analysts have viewed the city's rates as too low. But BGE has consistently objected to proposals to raise the rates, including a 3-cent increase the Board of Estimates approved in 2012.

In 2000, the Greater Baltimore Committee and the Presidents' Roundtable, both groups of business leaders, issued a report on government efficiency that called the conduits an untapped source of revenue. The report noted that a 1996 study said changing leasing rates could add $3 million to $25 million to the general fund. The study found cities across the country charged an average of $2 per foot, with Atlanta charging $5 per foot.

Since at least 2014, city officials have been in discussions with BGE about possibly raising conduit rates, documents show. In May, BGE countered with an unsolicited offer to buy the whole system.

In a July email, Vahos wrote that the $100 million offered would "provide an immediate influx of substantial cash to the city" and allow the city to stop spending about $8 million annually to maintain the conduit system. "BGE believes that it can manage and maintain the system at a cost equal to or less than the City's current conduit system expenditures," Vahos wrote.

If BGE were to buy the conduit system, it would mean the company would have the power to charge other users fees to access the ducts.

Another meeting between BGE and the city has not been scheduled, according to the documents.

Economists offered differing views on whether the city should sell the system.

Daraius Irani, chief economist at Towson University's Regional Economic and Studies Institute, said BGE's offer sounded "too low." If the city raises the rates, it could generate $16 million in revenue for city services, he noted.

"That's a steady cash flow coming in for the city. It could go on for years," he said. "The city would have to determine is it going to give up the present value of that cash flow for $100 million? Is it worth $160 million? $200 million?"

However, Irani noted the charge could amount to a pass-through rate increase on Baltimore's residents.

"They're going to pass on whatever additional costs they have to the customer base," he said. "The city would have to weigh that. It's almost like another tax on the residents of the city."

But Anirban Basu, an economist who runs the Baltimore-based consulting firm Sage Policy Group, said it could make sense for the city to privatize the conduit system.

"Obviously there's an advantage to buying it for BGE," he said."It effectively eliminates whatever economic risk they now face. They are now facing a large annual rate rise. Some future administration might talk about raising it yet further."

He said the price of $100 million is not an "overwhelming capital cost" for a company as large as BGE.

The city's decision about whether to sell, he said, is a "harder call."

"Is the objective to maximize positive fiscal impact or is it to protect residents from rate increases?" he asked. "If the goal is the former, it makes sense to raise the rent significantly. If the objective is the latter, which I think it should be, then probably a sale makes sense. It would generate capital without raising rates. It would create a windfall without having to turn to its tax base for the windfall."

lbroadwater@baltsun.com

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