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baltimoresun.com

BGE: Utility's finances will be protected if merger is approved

9:00 AM EDT, October 3, 2011

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Jay Hancock's Sept. 25 business column ("Regulators must protect BGE from potential Exelon trouble") emphasized the importance of protecting BGE's financial strength and independence as a condition of the proposed merger between the utility's parent, Constellation Energy andExelon Corp.

It's an important point and, fortunately, one Maryland's Public Service Commission has already tackled. In fact, Maryland can claim a strong leadership position nationwide when it comes to establishing protections for utility customers.

In 2009, as a condition of Constellation's nuclear joint venture with France's EDF Group, Maryland adopted some of the strongest safeguards in the nation to ensure a utility is shielded from potential missteps on the part of a parent corporation or its other businesses. These safeguards apply as well to the proposed Exelon-Constellation merger.

In regulatory parlance, the protections are known as "ring fencing." As the name suggests, ring fencing legally walls-off elements of a utility's finances and assets from a parent company or one of its businesses. This structural arrangement ensures BGE and its customers could not be harmed as a result of the Exelon-Constellation merger.

Two key provisions of the ring fencing rules in place in Maryland today would prohibit BGE from issuing a dividend if its credit rating is below investment grade, or if it would cause its equity ratio — a critical measure of financial strength — to fall below 48 percent following the payment of the dividend. BGE is also prohibited from commingling its cash with Constellation and, after the merger, Exelon.

While ring fencing provides extensive financial safeguards, it does not prohibit the positive flow of best business practices from one utility to another. BGE would gain from the knowledge and experience of Exelon's two large utilities, Pennsylvania's PECO and Illinois' ComEd. In fact, one benefit of the proposed union of Constellation and Exelon is the potential to enhance service and reliability at BGE.

Carim V. Khouzami, Baltimore

The writer is vice president, chief financial officer and treasurer of Baltimore Gas and Electric Co.