Gov. Martin O'Malley, questioning whether the relationship between BGE and its corporate parent has unfairly contributed to higher electric rates, has asked the Public Service Commission to hold expedited hearings on whether the company should be broken up and whether the utility's 1.1 million customers should receive rebates.
O'Malley said in a letter to PSC Chairman Steven B. Larsen that he has significant concerns about the dual role some executives play at BGE and the parent company, Constellation Energy Group, and whether that relationship led BGE to pay more for electricity than it should have.
"We need to know whether the relationship between BGE and Constellation may have contributed to the rate increase faced by Maryland's consumers this summer," O'Malley said.
O'Malley promised during last year's election campaign to stop the large BGE rate increases that came during the administration of his predecessor, Gov. Robert L. Ehrlich Jr., and he has faced intense criticism for failing to do so. A 50 percent electric rate increase for BGE customers took effect July 1, on top of a 15 percent increase last summer.
The governor has taken steps in recent days to encourage conservation and to prevent future rate shocks. But his letter to Larsen, obtained by The Sun yesterday, is the first suggestion that he hasn't given up on rolling back the rates.
Constellation spokesman Robert L. Gould said that the company will participate fully in any such hearings and that Constellation has followed all federal and state regulations.
"We continue to be confident that our rates reflect the true market price for electricity," Gould said. "They are the same if not lower than what other utilities are charging in Maryland and surrounding states in the Mid-Atlantic and Northeast."
Del. Patrick L. McDonough, a Baltimore County Republican who has been active on electrical issues, said that O'Malley is on the right track.
"The present system does not benefit consumers," McDonough said. "The Constellation execs cannot serve two masters. BGE should be an independent company. It should have its own power plants as it did in the past, and we should have access to that nuclear power plant [at Calvert Cliffs], and under the present system, we can't do any of those things."
Del. Dereck E. Davis, a Prince George's County Democrat and chairman of the committee that handles electrical power issues, said O'Malley should be commended for his interest in utility policy.
But he said that the focus on the BGE-Constellation relationship may be misguided, pointing out that BGE customers pay about the same rate for electricity as Washington-area customers of the utility Pepco, and that Pepco doesn't have the kind of relationship with a corporate parent that BGE does.
"That almost in and of itself supports the claim that it's the market and not some sort of nefarious relationship Constellation has with Baltimore Gas and Electric," Davis said.
O'Malley's letter is based on findings the PSC made in May in a report that questioned several aspects of the relationship between Constellation and BGE.
However, the governor appears to have misread the regulators' report on a key point. O'Malley quotes the PSC's findings to suggest that "tens or even hundreds of millions of dollars ... may have been [improperly] passed through to [BGE] ratepayers, rather than borne by Constellation's shareholders."
The text of the PSC's report says just the opposite. Costs to upgrade power plants, in part to comply with environmental regulations, were borne by Constellation shareholders because of deregulation, the report says. Under a regulated system, those costs would have been borne by ratepayers.
Although PSC members are appointed by the governor, they are considered independent. However, Larsen said that he has already taken steps to investigate the Constellation-BGE relationship and will likely be able to begin hearings in September, as O'Malley requested.
"There are possible or apparent conflicts between the financial interest of Constellation and the statutory obligations of BGE," Larsen said.
When Maryland deregulated the electricity industry in 1999, utilities such as BGE were forced to relinquish their power plants. The idea was that they would act as regulated delivery agents for power but that customers would have a choice of suppliers of the electricity itself.
However, competitive markets have yet to develop anywhere in the state, and most customers still buy their power from their traditional local utilities, which buy electricity on the open market. In BGE's case, most of that power -- 70 percent in the last year -- came from Constellation.
Although the PSC concluded in May that it did not have legal grounds to stop the rate increase, it raised questions about BGE's relationship with Constellation.
The commissioners, the majority of whom were appointed by O'Malley, said BGE's aversion to constructing new power plants seemed more likely to benefit Constellation shareholders than BGE customers.
They also questioned the dual role of John Collins. As Constellation's chief risk officer, he advises the company on how to price its electric supplies for auctions in other parts of the country, but he also advises BGE on the auctions in which it buys electricity for the Maryland market.
"The evidence suggests that many of those factors which this commission has identified as being disadvantageous to residential customers of BGE can be advantageous to the financial performance of [Constellation]," the PSC said in its May order.
Nonetheless, the PSC concluded that unless state law changes to give government a stronger hand in regulating utilities, "there may be limited opportunities to address the perceived inequities between Constellation's good fortunes and the higher prices now paid by consumers of electricity."
Thomas A. Firey, managing editor of the Cato Institute's magazine Regulation, said there is significant dispute even among free market advocates over whether the standard deregulation model employed in Maryland and elsewhere works. And whether an arrangement such as that between BGE and Constellation is workable is a completely open question, he said.
But if the PSC finds that Constellation and BGE are working too closely together, it may not mean much relief for consumers, Firey said. Even if Constellation didn't offer to sell its electricity to BGE for as low a price as it could have, it still bid lower than any other company, Firey said.
The question, he said, is why more companies aren't bidding and whether the money Constellation is making will induce others to compete.
"This is something consumers are not going to want to hear because they're going to get their bills and they're going to be unhappy, and I completely sympathize," Firey said. "But this industry is still shaking out a lot, and when you have stuff shaking out, you have some people making a lot of money."
andy.green@baltsun.com