Constellation defends profits

THE BALTIMORE SUN

Constellation defends winning bids on energy Constellation Energy Group disclosed to lawmakers yesterday that it was by far the biggest winner in an auction to supply electricity to Baltimore Gas and Electric customers - a fact that could bolster critics of the state's electric deregulation process and a planned 72 percent rate increase for household customers.

In response to a request by state legislative leaders, the company released a 30-plus-page document detailing its business practices and finances. Constellation defended the rate increase and disclosed that it stands to make a 3.1 percent profit on the power it sells to BGE - a rate of return that some industry experts say would be considered modest in today's volatile market.

Constellation revealed that after a series of three such auctions last winter, it won contracts to supply 70 percent of BGE's customer load for the year beginning in July. The winning bids are behind the 72 percent rate increase.

Whether the document will propel an issue that has dominated state politics this spring and revive calls for a special legislative session was not immediately clear.

"We asked some very specific questions, and instead of specific answers, we got 40 pages of very difficult-to-understand corporate answers," Senate President Thomas V. "Mike" Miller said yesterday. "We're going to have the Department of Fiscal Services go through the letter, but my initial reaction as a lay person looking at the letter is it was not clear enough in terms of what we asked, either in terms of executive compensation or their profit margin in terms of the relationship between BGE and Constellation."

Constellation says its arguments definitively refute claims that the company stands to make excessive profits and that it should give back stranded costs it gained as a result of deregulation.

In its letter to House Speaker Michael E. Busch and Miller, the company claims that it has been losing money on its Maryland power plants as a result of six years of rate caps imposed by regulators as part of deregulation. It also contends that ratepayers were the financial winners in a deal to transfer ownership of BGE's power plants to Constellation because of the high cost of maintaining and operating the plants.

"We believe that what we have provided lays out very clearly the fact that we are not making egregious profits and we are not raking in the profits on the backs of our customers," said Robert L. Gould, a Constellation spokesman.

The House and Senate leaders requested financial details on everything from executive bonuses to power plant profits in hopes of finding data that could be used to force the company to provide more rate relief for customers.

Lawmakers tried, but failed, to pass legislation in the final minutes of the legislative session in April that could have softened the blow of the 72-percent rate increase. Busch and Miller are now contemplating a special session to revisit the issue.

Yesterday's response may fall short of mollifying critics who say nothing less than full financial disclosure and cross-examination of corporate executives will answer lingering questions about whether the rate increase is justified.

Some academic and industry experts say the data doesn't go far enough to allow for a complete analysis and that the company's dominance in the bidding for BGE's power load suggests there may not be enough competitors to ensure that customers get the lowest prices. State regulators recently opened an inquiry to consider changes in the energy auction process.

As part of the move toward deregulation, BGE transferred its power plants to a Constellation affiliate. It now must purchase its power on the wholesale energy market through a series of reverse energy auctions in which the lowest bidder wins. In the auctions last winter, Constellation's low bids won it contracts to supply 70 percent of BGE's customer load starting next month.

"So with 70 percent capacity, it sounds like you're the gorilla in the living room," said Lester B. Lave, an economics professor at Carnegie Mellon University and co-director of its Electricity Industry Center. "And if you've got 70 percent, then it wouldn't be outside the pale for you to be tempted to manipulate the market if you had that much share."

In its letter to lawmakers, Constellation says the rising rates are a direct result of soaring energy prices and disputes the notion that the auction process was anti-competitive. In the past two years, it has participated in 162 similar auctions in several Northeast and Mid-Atlantic states and has won 70 percent or more of the load in nearly a third of those auctions. In each case, its average rate of return was 3.3 percent, the company said.

Energy consultants who work for state utility commissions say it's not unusual for one or two companies to win more than half to two-thirds of the load put up for bid in power auctions. That's partly because the profit margins are extremely thin, which means one company can dominate the process by bidding just a hair less than competitors.

"It may be that by owning a lot of cheap [power plants], you could probably figure out how low other people could bid and then nudge just under their bid, which is not a sign of a competitive market," said Gerald Norlander of the Public Utility Law Project, an Albany, N.Y.-based consumer advocacy group.

How much money Constellation is making off the power plants it took from BGE six years ago remains a key point of contention for lawmakers exploring the rate increase. But the company refused to disclose such information in its letter, saying it wasn't relevant.

That claim provides a window into deregulation, in which electrons are bought and sold in a wholesale market that lies outside the grasp of state regulators and that some critics contend is vulnerable to manipulation.

No longer is there a direct line linking BGE customers to Maryland power plants like the Calvert Cliffs nuclear station. Constellation sells that power to buyers in the wholesale market operated by the PJM Interchange, which is located outside Valley Forge, Pa. The power Constellation will sell to its BGE affiliate will be purchased in that same wholesale market through long-term contracts.

But the price it pays for that power is set by the market. Unlike in a regulated market, it is no longer based purely on what it costs Constellation to produce it. In fact, the company says most of the power it generates with plants it owns in Maryland and elsewhere is sold two and three years in advance to a variety of buyers. About 93 percent of the power it will provide to BGE this summer was purchased at prevailing market rates determined in the PJM market, the company said in its letter.

"This shows that deregulation is absolutely the cause of the huge rate increase," said Tyson Slocum, director of the energy program for Public Citizen, a consumer advocacy group. "If BGE still had control over its low-cost power plants, it wouldn't be forced to buy 93 percent of its power from 'the market.'"

But Constellation says ratepayers are better off as a result. The company hired an outside consultant who calculated that BGE's residential and commercial customers saved $2.6 billion over what they would have paid for energy in the past six years had it not been for deregulation.

The company says it lost $500 million in potential revenue from those plants because of the rate caps imposed by regulators, and that the $528 million in stranded costs it collected during the six years doesn't make up for the $903 million in plant improvements and repairs it had to make during that time. The company faces costs of an additional $900 million or so in coming years as a result of new pollution-control requirements - all of which will be paid for by shareholders. In a regulated environment, those costs would have been passed on to customers through higher bills.

The company concedes that the value of its Maryland plants climbed from an estimated $2.3 billion six years ago to about $4.3 billion as of March. But it says the rate of return on that investment is a "modest" 5.3 percent.

paul.adams@baltsun.com

Sun reporter Andrew A. Green contributed to this article.

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