Keep an eye on what BGE customers are subsidizing


Florida electric customers just got billed $1.1 billion to fix hurricane-damaged power lines. Will Marylanders bear similar costs if Baltimore Gas and Electric Co. and Florida Power & Light wind up in the same company, as planned?

Can't happen, say executives at the utilities' parents, Florida's FPL Group and Maryland's Constellation Energy. Regulations ban them from siphoning money from BGE to pay for hurricanes or any other unrelated expenses, they say.

But the operations of a little-known cash pool shared by BGE and other Constellation affiliates cast doubt on these assurances and show again why the Constellation-FPL merger needs to be examined very, very carefully.

Case No. 9036 before the Maryland Public Service Commission presents what critics portray as a smoking gun of cross-subsidization, of BGE customers paying for things that have nothing to do with the cost of buying and delivering energy to their homes and businesses.

For years, BGE and other Constellation units have contributed to a pool financing one another's short-term borrowing. The problem is that BGE provides much of the money and affiliates seem to have done most of the borrowing - apparently without reimbursing BGE its full costs.

BGE denies that ratepayers subsidize unregulated affiliates, saying there is no link between the cash pool and retail energy costs. But late last year, two members of the PSC - a panel not known for being tough on utilities - forcefully disagreed. And so do the Maryland People's Counsel, an advocate for residential ratepayers, and a group representing Domino Sugar and other manufacturers.

As part of a much larger case involving natural gas rates, two of the five Maryland PSC members found that, in 2004 and 2005, BGE's expense for funding the pool "imposes unnecessary costs on customers; costs unrelated to the provision of utility service." The arrangement, the members said, "unfairly burdens ratepayers with several million dollars in excess costs."

That opinion came from none other than PSC Chairman Kenneth D. Schisler, seen by many as the pro-utility rubber stamp of Gov. Robert L. Ehrlich Jr. Joining him was Allen M. Freifeld, who worked for the commission more than two decades before becoming the first staff member named a commissioner, according to the panel's Web site.

They were outvoted by the other three PSC members.

As a result, what Schisler and Freifeld called excess costs tied to the pool - estimated at $3.4 million - were passed into natural gas prices for BGE customers.

A BGE-style money pool "would have a hard time getting approved in a lot of states," says Bob Jenks, director of the Citizens' Utility Board in Oregon, which erects strict firewalls between utilities and affiliates.

"Essentially this is a way to have the utility loan money" - to use its borrowing power "to fund activities of unrelated entities," Jenks says.

Why does it matter now? Certainly the amount in the gas case adds only pennies to a typical bill and is nowhere near what would be needed to fix hurricane damage. Because BGE's electric delivery charge is frozen (in contrast to generation expense, which will soon cause bills to spike), its cash pool activities in recent years would not have affected electric rates.

But critics say the arrangement demonstrates flimsy walls between BGE and Constellation that could create bigger risks if Constellation merges with FPL.

"If Florida Power & Light has a greater need to take out loans because of hurricanes or any other subject, then obviously they're going to have an even greater call on the cash pool than Constellation" - with the cost potentially borne by BGE ratepayers, says Michael Powell, a lawyer representing the Maryland Industrial Group, a consortium of manufacturers.

BGE certainly seems to be giving the pool more than it's getting from it. For a year and a half beginning in 2004, when it had as much as $359 million in the fund (in the first quarter of 2004), BGE lent to the pool nearly the whole time and borrowed only 26 days, according to PSC and Securities and Exchange Commission documents.

And BGE's cost for providing the cash was 6 percent or greater while Constellation affiliates borrowed at teeny, short-term rates - as low as 1.5 percent, Schisler and Freifeld said in their dissent. Constellation's other businesses include electricity generation, power trading and real estate, although it is unclear which entities borrowed from the pool.

"The money pool imposes extra costs on BGE that would not be borne by the company if it were not affiliated with Constellation," they concluded.

Mark Case, BGE's vice president of electric supply and regulatory services, denied that the pool could have any effect on customer rates and said the company was "dumbfounded" by Schisler's and Freifeld's opinion.

Even so, the pool represents an unacceptable contact between the utility and its siblings and should be drained - whether or not Constellation and FPL marry.

"It's something we plan to explore in the merger case review," says William Fields, senior assistant People's Counsel. "Our goal is to ensure that ratepayers are protected from any possibility of cross-subsidization."

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