A 50 percent rate increase that took effect in June sent Baltimore Gas and Electric's revenue up 35 percent in the second quarter, but most of the money went toward buying more expensive electricity from wholesale energy suppliers - including the utility's corporate parent, Constellation Energy Group.
Constellation reported yesterday that its second-quarter profit climbed 25 percent on higher wholesale power sales, while BGE earnings fell 27 percent year-over-year as higher expenses more than offset revenue growth.
Constellation's net income for the quarter was $116.3 million, or 64 cents per share, compared with $93.1 million, or 52 cents per share, in the year-earlier period. BGE's contribution to quarterly earnings was 8 cents per share, down from adjusted earnings of 11 cents in the year-earlier period.
The contrast in earnings is symbolic of the complicated relationship between BGE, the state's biggest energy buyer, and Constellation, the state's largest energy producer, that evolved from deregulation of the state's electricity markets. The relationship took center stage this week after the Public Service Commission subpoenaed Constellation for records detailing its profits from power sales to BGE and other documents.
The inquiry is one of two requested by Gov. Martin O'Malley and some lawmakers as they try to deal with rising electric rates resulting from the move to deregulation.
On Thursday O'Malley asked for an inquiry into whether the wholesale energy market is delivering rates that are "just and reasonable," a request that resembles an effort in Illinois that led to a $1 billion settlement with that state's utilities.
Industry analysts praised the earnings results, but some participating in a conference call with company executives queried Mayo A. Shattuck III, Constellation's chairman and chief executive, on where the Maryland investigations could lead.
One asked Shattuck to compare the $386 million in credits that state lawmakers forced BGE to provide in legislation last year with the $1 billion Illinois settlement. That settlement came after lawmakers pressured the companies to lower rates in the face of rate increases similar to or worse than those experienced in Maryland. Some industry analysts are concerned the case could prompt lawmakers in Maryland to seek bigger concessions from BGE.
"I think maybe you could argue that the Maryland customer got a better deal than the Illinois customer, on average," Shattuck said.
The Illinois settlement will be spread among more than 5 million utility customers over four years, compared with the 1.1 million BGE customers who will share $386 million over 10 years.
Shattuck said he is confident the PSC will find that wholesale energy prices in the Maryland region are fair. PJM Interconnection, which oversees the wholesale market for Maryland and 12 other states, is held up by federal regulators as a model for how competitive electricity markets should be organized, he said.
Critics of wholesale markets generally agree that PJM is the best among the nation's regional grid operators. But some academics and industry consultants have raised questions about whether the market is vulnerable to price manipulation. PJM's chief market watchdog also recently raised questions about the independence of market monitors.
Shattuck said it was too early to comment on the future ownership of BGE, which O'Malley has suggested should be split off from Constellation if the PSC inquiry turns up evidence of a conflict of interest. Some analysts have hinted that shedding BGE could allow Constellation to operate unfettered by the kind of state oversight that is occurring right now.
"I think the political concerns have weighed on Constellation's stock," said Paul Fremont, an analyst with Jefferies & Co.
Constellation's shares ended down $2.61, or 3 percent, yesterday to $84.91 per share.
Shattuck said in an interview that the company is confident that inquiries in Maryland will show BGE and Constellation comply with all regulations governing affiliate relationships.
But he said it's appropriate for state officials to probe the relationship with BGE, especially given the potential for changes in the Maryland market. For example, if BGE is allowed to build a power plant in the future, it would be competing with Constellation.
Analysts say the outcome won't have a great impact on Constellation's earnings power in the near term. The company is in a strong position because it owns power plants in New York and Maryland, where wholesale energy prices have increased in recent years. New wholesale market rules increase profits for generators in areas where energy is scarce, which includes much of Maryland and Washington.
"It's the strong fundamental position with respect to the power plants, where those plants are located and what management has been able to do with them," said Paul Patterson, an analyst with Glenrock Associates in New York.
The company is considering adding generating capacity in Maryland, including building a new nuclear reactor at Calvert Cliffs. But it recently decided to pass for now on developing wind power in Western Maryland.
Constellation reported yesterday that it took a $12.2 million charge against earnings in the second quarter after deciding not to act on wind development rights it acquired from FPL Group Inc. when the two companies abandoned their merger plans last year.