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BGE trade with parent under scrutiny

The Baltimore Sun

As a public utility, Baltimore Gas and Electric Co. is obligated to get the lowest price possible for customers. By contrast, its corporate owner, Constellation Energy Group, has a duty to stockholders to sell the power it produces for as much as it can get.

This disconnect is highlighted by the fact that Constellation, which assumed ownership of BGE's former power plants when Maryland adopted electricity deregulation, is the state's biggest seller of power and BGE is its biggest buyer. But what some consumer advocates call a conflict of interest is getting more scrutiny now, as Constellation's profits and stock price soar along with the rates that BGE's 1.1 million customers are paying.

In its May 23 order approving a 50 percent rate increase for BGE residential customers, the Public Service Commission said it plans to study whether the utility's relationship with Constellation works to the detriment of Maryland consumers. The probe would coincide with a series of studies that lawmakers ordered as part of a comprehensive review of utility regulation in Maryland.

As an example, the commission noted that BGE is opposed to owning power plants again - an idea the commission says could help reduce rates but also could cause the utility to buy less power from its corporate parent. The commission also questioned whether at least one Constellation officer has a conflict of interest when doing certain types of work for both BGE and Constellation.

"The commission will examine whether this affiliate relationship impacts the manner in which BGE satisfies its statutory obligations to customers in this state," the commission wrote.

BGE and some industry analysts dismiss the concern, saying the utility's relationship with Constellation gives it lower borrowing costs, less corporate overhead and other advantages it wouldn't have as a smaller, independent company.

Constellation replies

Constellation says it welcomes the scrutiny and will cooperate with the commission.

"Although we are confident that the interactions between Constellation and BGE are entirely appropriate, we are studying the commission's order to understand its concerns and consider whether there are alternatives that balance the need for corporate governance while preserving the benefits to consumers," said Rob Gould, a Constellation spokesman.

The line of inquiry reflects the commission's more critical approach to utility regulation since Gov. Martin O'Malley appointed three new members. Emboldened by a restless General Assembly and consumer outrage over electric rates, the five-member panel is challenging the underpinnings of the state's deregulation laws, adopted in 1999.

Part of the underlying premise of deregulation was that if utility companies don't own power plants, they can go into the open market and buy power from multiple suppliers that compete to be the lowest bidder.

"One difference between the prior commission and the commission that's seated now is we are very much engaged in a process to see what we can do to make things better, and not take at face value the proposition that markets are good," said Steven B. Larsen, PSC chairman.

The PSC order didn't accuse Constellation of breaking any rules. But it did call into question the dual role that John Collins, Constellation's chief risk officer, has played in the energy auctions that are critical in setting prices for power on the open market. Collins has since been promoted to chief financial officer.

When Constellation - an energy seller - sought to supply electricity to utilities and municipalities in other states, Collins and his team provided information that helped the company formulate its bid.

Switched sides

But when BGE - an energy buyer - sought bids for the power it distributes to customers, Collins switched sides and acted as an adviser to the utility. In that role, he saw the bids of companies that compete with Constellation for BGE's business.

The commission said it wants to explore whether that violates the spirit of state regulations requiring bids to remain largely confidential. Some industry analysts and utility officials say the information Collins might have picked up as an adviser to BGE could be gleaned from other public sources and would be of little competitive use to Constellation.

Some industry analysts have suggested Constellation could eliminate the appearance of conflict by spinning off BGE. Constellation contemplated that action in 2000, but the company later abandoned the strategy and regulators maintained the current structure during the transition to a deregulated power market.

Seven years later, retail competition is spotty at best, and Constellation remains BGE's largest supplier of electricity. Meanwhile, no new power plants have been built and electricity costs have soared, reflecting higher energy prices and peculiarities in the way the wholesale market works. The situation is particularly acute in Maryland because the state must import about 30 percent of its power from other states.

The energy shortfall is bad for BGE customers, who are paying 70 percent more for their electricity than they were before state-imposed rate caps expired last summer. But it's good for Constellation, whose first-quarter profits climbed more than 70 percent compared with a year ago, partly because of increased income from its Maryland power plants.

State regulators say one potential fix is to require BGE to build or lease new power plants. That would set up a partial return to regulation, something many consumer groups advocate. The downside is that ratepayers would have to pay for the new plants, which are increasingly expensive to build and could end up driving rates even higher - though profits from the plants would be set by the state.

BGE is against the idea, arguing before the PSC that it no longer has the expertise to build and operate power plants. It says changing course would be worse for consumers in the long run.

For starters, the utility says, building and owning a power plant is perhaps the most expensive and financially risky part of being in the energy business. As a result of deregulation, that burden now falls to shareholders of companies such as Constellation, rather than to ratepayers. In addition, BGE argues, market data show that competition among wholesale energy suppliers has increased plant efficiency and - absent rising fuel costs - helped drive the cost of producing power below what it was before deregulation.

The company says it is confident the PSC will find that Maryland ratepayers will be better off if Constellation adds more unregulated power plants. Constellation testified before the PSC that it is considering expanding two existing power plants. It also is contemplating a new nuclear reactor at Calvert Cliffs.

But critics point out there is no guarantee Constellation will make construction decisions with the best interests of BGE customers in mind. Under the right conditions, Constellation and other generators could profit more by keeping supplies scarce, and prices high.

"They have supply in a market where demand exceeds supply," said Larsen, the PSC chairman. "Would BGE approach their response to this environment differently if they didn't have a corporate parent with the financial interests that Constellation has?"

New Haven, Conn.-based United Illuminating Co. might be a case in point. The utility's customers are facing an identical 50 percent rate increase, partly the result of a dearth of power plants and transmission lines in that part of the state. Connecticut, which deregulated in 1998, has the highest electricity rates in the nation.

But United Illuminating, unlike BGE, is not affiliated with a company that owns generation. It has said it would consider owning certain kinds of power plants again if that would help bring down rates and increase reliability of the grid.

"I think everyone in the state of Connecticut agrees that we do not have enough generation, and the state has through the legislature and regulatory agencies been looking at ways of helping that," said Anita Steeves, a spokeswoman for the company. "We're looking at it as a reliability issue."

Connecticut lawmakers recently passed an energy bill that would allow utilities to own certain kinds of generation again. The type of plants allowed are typically natural gas-fired generators that are turned on briefly during times of peak demand.

That's the kind of power plant Maryland's PSC is contemplating for BGE. A so-called "peaking" plant would do little to solve the state's energy shortfall, but it could help BGE avoid paying a premium for power on hot days when everyone turns on air conditioning for relief.

"You're not talking about generating all of the power, but maybe something to take the edge off the price," said Kenneth Rose, a Columbus, Ohio-based industry consultant.

paul.adams@baltsun.com

CONSTELLATION TIMELINE

1982:

Baltimore Gas & Electric seeks to create a holding company called BGE Corp. This, the company tells shareholders, would give "management greater flexibility to develop alternative business opportunities."

1985:

After the holding company plan is blocked by state regulators, BGE creates a subsidiary, Constellation Holdings, to invest in other businesses.

1992:

Congress passes the Energy Policy Act, setting the stage for deregulation of the electricity utility industry.

1998:

BGE and Goldman Sachs & Co. form a joint venture, Orion Power Holdings Inc. Orion buys a number of power plants from various companies before being sold in 2002 for $4.8 billion to Houston-based Reliant Resources Inc. In the deal, Orion's Baltimore office is closed.

1999:

Constellation Energy Group Inc. becomes the holding company for BGE and related companies. General Assembly passes an energy deregulation law and Gov. Parris N. Glendening signs it into law. Plan includes a rate cut and four years of rate caps, later extended to six years by the PSC.

2000:

Deregulation begins with rates cut to pre-1993 levels. Constellation announces plan to split into two companies, BGE and a company to generate and sell power nationally.

2001:

Constellation junks its plan to split.

2004:

Rate caps end for commercial customers. Residential caps remain.

2005:

Natural gas prices soar after Hurricanes Rita and Katrina, helping send wholesale electricity prices higher and setting stage for record BGE rate increase.

2006:

Rate caps end in July. BGE customers are told of 72 percent rate increase, later temporarily limited to 15 percent by lawmakers.

2007:

Gov. Martin O'Malley is elected, replaces three PSC members. New commission approves BGE rate increase May 23, orders numerous studies of deregulation reforms.

[Sources: Constellation Energy Group, Sun archives, Public Service Commission]

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