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The battle over your energy bill

THE BALTIMORE SUN

On Wall Street, the proposed merger between utility owners Constellation Energy Group and Florida-based FPL Group Inc. is an easy sell.

Together, the two energy companies stand to dominate unregulated power sales to Fortune 100 companies and municipalities nationwide, while still reaping the guaranteed earnings of two high-performing regulated utilities in their respective home states. Big profits are sure to follow for the parent of Baltimore Gas and Electric Co., analysts say.

But the view is different from Main Street.

While shareholders and executives stand to gain millions in the merger, power customers in both states see their energy bills skyrocketing even as their home-state utilities report soaring profits.

And while the reasons have much to do with gyrating world energy markets and hurricanes, the disconnect has caught the attention of some consumer advocates and lawmakers.

They hope to pressure regulators into forcing the companies to pass on some of the benefits of their success to customers after the merger.

"The big winners in this are the utility executives and the stockholders," said Sen. Leo E. Green, a Democrat from Prince George's County who serves on a special Senate commission looking at electricity deregulation. "All we can do is call on them to have a full evidentiary hearing, put them under oath and make them come out with their plans."

Part of the difficulty for the utilities is that the merger suffers from bad timing, occurring in what promises to be a heated election year when soaring energy prices and power plant pollution are sure to find their way into stump speeches.

In Maryland, merger hearings and electioneering will take place just as caps on residential electricity rates are about to expire, potentially resulting in increases of 60 percent or more starting in July.

Although the change was approved years ago, the public has yet to feel the effects. Meanwhile in Florida, FPL is taking heat for a recent 19 percent rate increase on top of customer surcharges to recover nearly $1 billion the utility spent on hurricane recovery from recent storms.

"Energy has become the new wedge issue," said Mitch Klein, an organizer for the Association of Community Organizations for Reform Now, or ACORN. The community activist group opposes the merger on the grounds that it will hurt consumers.

The Maryland rate caps are the product of a 1999 law deregulating the state's power market, a measure lawmakers hoped would lead to lower prices as energy companies competed for business.

To ease the transition, residential rates were capped at below-1993 levels for six years, after which they will be subject to the free market.

But competition hasn't arrived, and the cost of producing power has soared along with the cost of natural gas and other fuels that are burned to make electricity.

"Our customers have benefited by this artificially low price for six years, and now we're going to have to go into the market to buy energy at the prevailing price," said Kenneth W. DeFontes, president of BGE.

The utility has remained profitable despite the caps but largely because it was able to sign a three-year electricity supply contract in 2003, when prices were low. That contract expires this year.

Company executives and utility regulators point out that the merger and rising energy prices are separate issues that just happen to be making headlines at the same time.

But some lawmakers and consumer groups are seeking to link the two as part of a broader dissatisfaction with the way unpredictable energy markets are wreaking havoc with family budgets.

The debate is likely to play out across the country after the repeal that took effect this month of a New Deal-era federal law that curbed utility mergers. Some of the proposed mergers will come before regulators just as the early, and sometimes unfavorable, effects of deregulation are felt. Lawmakers in Maryland, Delaware, New Jersey, Illinois and elsewhere are rethinking the timetable for deregulation in the face of consumer outrage over price increases.

"You have to ask the question, 'What is the ratepayer getting?'" said Mike Bedley, a partner with Davie, Fla.-based energy consultant APEX Power Services Corp. "Because in some cases, they get nothing in the merger."

Company officials disagree, saying the merger and laws deregulating the industry will lead to efficiencies that will eventually benefit utility customers.

But the gathering anti-merger sentiment worried Constellation Chief Executive Mayo A. Shattuck III enough that he set up a private meeting last Thursday with members of ACORN, which has been joined by a coalition of labor and community groups opposing the merger.

The company is also stepping up its contact with lawmakers in Annapolis.

Florida Power & Light Chief Executive Lewis Hay III, who will lead the merged company, met with some of the company's lobbyists during a visit to Maryland last week.

If lawmakers are looking to place blame for rising prices, he said, they need look no further than Hurricanes Rita and Katrina, which knocked out natural gas and oil production in the Gulf of Mexico in the fall. Those outages -- combined with rising demand for fuel from developing countries like China -- resulted in higher prices.

"The main thing that's causing these prices to go up has nothing to do with anything BGE has done, nothing to do with anything Constellation has done and nothing to do with anything Florida Power & Light has done," he said. "This is a worldwide issue that we're dealing with."

That argument hasn't stopped politicians in Maryland and several other states from trying to ease consumer angst by imposing limits on rate increases.

Gov. Robert L. Ehrlich Jr., whose administration has been criticized for its close ties with Constellation, directed the Public Service Commission to devise a plan to ease the transition to higher rates.

The commission's staff has proposed a two-year phase-in of rate increases for customers who request such a deferral. But the plan would essentially charge customers interest on the deferred portion of their bill, resulting in higher cost over time.

Del. Patrick L. McDonough, a Baltimore County Republican who is hoping to use the rate-cap issue to stir up opposition to the merger, is challenging the commission's proposal. He has proposed legislation that would cap BGE rate increases at 5 percent annually over five years. McDonough says the bill has attracted 50 co-sponsors, but its chances are questionable.

"I'm concerned that we're getting hit with a one-two punch as consumers in the state of Maryland, both with the sell-out [to FPL] and the removal of the rate caps on July 1," he said. "It reminds me of the Baltimore Colts slithering out of town under dark of night with Mayflower moving vans."

McDonough's proposal has alarmed Constellation executives, who say it will force BGE to borrow $500 million to $600 million to make up the difference between what it will have to pay for electricity and what the law will allow it to charge customers. That could lower the company's credit rating and scare off investors, which would hurt ratepayers by making it more expensive for the company to fund grid repairs, they say.

The company is planning to spend more than it takes in next year to upgrade its wires, transformers and other distribution equipment.

"In the last four years, we have invested about $1 billion in [capital improvements] for BGE," DeFontes said. "We haven't raised rates for customers, so we've been eating it, essentially."

McDonough and other merger critics are not swayed, saying the issue of rising prices is just one of a number of concerns they have about the deal with FPL.

Some lawmakers and consumer activists also worry that profits from the regulated utilities -- BGE and FPL -- will be used to subsidize Constellation's riskier unregulated businesses. That includes the company's fast-growing business of buying power on the open market and selling it to big industrial customers nationwide.

Many industry analysts dismiss such concerns, saying regulations prevent the companies from mixing the two sides of the business.

"That's the kind of thing regulators look out for," said Paul Patterson, a utility analyst with Glenrock Associates in New York.

Critics also point to consumer complaints against FPL and worry that the same management will be calling the shots in Maryland after the merger.

Florida's largest utility has been hammered by complaints that it did not adequately maintain its system, resulting in an unnecessary number of outages after a series of hurricanes battered the region over the past two years.

"I feel that FPL has been operating the grid on the cheap and hasn't been doing maintenance as well as they could," said Jim Naugle, mayor of Fort Lauderdale.

He said the city is considering hiring another company to manage its electric grid when its contract with FPL expires in 2009.

FPL says the number of hurricane-related outages in its service territory was lower than Department of Energy models predicted for storms in 2004. Hay, the chief executive, also points to more recent statistics showing that an average customer of the company goes without power about 74 minutes a year, compared with the national average of 139 minutes.

The Florida Office of the Public Counsel, the state's utility watchdog agency, said Marylanders have nothing to fear from FPL.

"Americans love to hate monopolies, and we hate ours as good as anybody hates theirs," said Harold McLean, the public counsel. "But if I lived in [Maryland], I would welcome them to town. It's a well-run company."

McLean's Maryland counterpart, Patricia A. Smith, was more skeptical. The Maryland Office of the People's Counsel has called on the Public Service Commission to hold detailed hearings on the merger.

"FPL does not have a good consumer report card, and we want to be sure that the standard of care [in Maryland] is not going to be somehow lessened by the merger," she said.

paul.adams@baltsun.com

COLLISION COURSE

Key dates behind the convergence of the Constellation Energy merger and pending electricity rate increases:

April 1999:

Gov. Parris N. Glendening signs legislation deregulating electric industry.

April 1999:

Constellation Energy formed. Baltimore Gas & Electric Co. becomes regulated subsidiary.

August 2000:

Deregulation begins. BGE rates capped at pre-1993 levels for six years.

October 2003:

Constellation executives warn lawmakers that rates could climb when rate capsexpire.

July 2004:

Rate caps end for commercial energy customers. Residential caps remain.

August 2005:

Hurricane Katrina damages Gulf gas and oil production, sending energy prices soaring.

Dec. 19, 2005:

Constellation Energy and FPL Group Inc. announce merger plans.

Feb. 23, 2006:

Deadline for parties to file with the Maryland Public Service Commission to offer testimony in state regulatory proceedings about the merger.

Feb. 28, 2006:

Commission to hold pre-hearing conference and set timetable for merger hearings.

July 1, 2006:

Rate caps implemented in 2000 expire. Rate increases of 60 percent or more possible.

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