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Electricity deal costs customers, report says

The Baltimore Sun

Baltimore Gas and Electric customers took on nearly $1.5 billion in costs in exchange for rate cuts worth barely one-fifth of that amount in the 1999 settlement that moved the state toward deregulation, according to a report released yesterday by regulators.

It marked the second day in a row that the Maryland Public Service Commission said consumers have been hurt by state and federal decisions governing power markets.

In yesterday's report, consultants hired by the PSC say that the 1999 settlement was lopsided in favor of BGE's corporate parent, Constellation Energy Group. A key part of that settlement with regulators laid out terms by which BGE would transfer ownership of its power plants to Constellation.

The deal established the so-called "stranded costs" that consumers would pay to compensate Constellation for taking on the plants in a deregulated environment. When regulated, plant owners are allowed a specific rate of return. But deregulated owners enjoy no guarantee of profits or customers and bear greater financial risks.

The report by Kaye Scholer LLP says regulators did not sufficiently examine the liabilities that the deal placed on ratepayers. Had the full extent of the costs and benefits been weighed at the time, the deal would not have been found to be in the "public interest," the report says.

Regulators also allege that BGE might have violated some of the deal's terms, and said they will consider whether some of the money that consumers paid can be recovered through rebates or credits on their bills.

Constellation sharply criticized the report, saying it relies on faulty analysis and is an attempt to rewrite history. Maryland courts have twice upheld the deal's terms in past disputes.

"While Constellation will continue to be a willing participant in any productive dialogue, we will unequivocally reject any mischaracterization of our actions," said Mayo A. Shattuck, Constellation's chief executive.

The report is the second in a series of studies ordered by lawmakers last year to examine the fairness of the state's power market in the wake of a more than 70 percent increase for BGE customers during the past two years. BGE is Maryland's largest utility with 1.1 million customers.

"Ultimately, the General Assembly will take up the larger issue as to whether any of the terms and conditions of the transfer can be changed after the fact," said Steven B. Larsen, PSC chairman.

Del. Dereck E. Davis, who voted in favor of deregulation in 1999 and is chairman of the House Economic Matters Committee, acknowledged that lawmakers made mistakes in approving deregulation. But he said the General Assembly is focused on fixing those errors.

"This was uncharted territory for the legislature," he said. "We took the information presented before us and made the best decision we could, as did the Public Service Commission at that particular time."

The report focuses in part on $975 million in stranded costs BGE customers paid to compensate Constellation for taking on power plants in the deal.

The consultants say that between 2000 and 2003, the company diverted some of those payments to offset losses the utility incurred by buying power from a Constellation affiliate that may have charged inflated prices. The company denied that it acted improperly.

BGE has said it lost money buying power because of a six-year, 6.5 percent rate cut for customers as part of the settlement. PSC consultants dispute that assertion, arguing that utility customers essentially funded their own rate cut as a result of the company's diversion of the stranded-cost payments.

The report questions whether the action was a violation of the utility's settlement with the state and if those disputed payments can be returned to ratepayers.

In addition, the report criticizes the deal for giving Constellation ownership of the Calvert Cliffs nuclear plant, while saddling BGE customers with the potentially $5 billion or more costs to decommission the plant after its operating license expires. The report says a fund set up to pay for decommissioning was underfunded by $491 million at the time of the deal and faces an even bigger shortfall in the years ahead.

Constellation said that assertion is false. It said it is in compliance with federal regulations, which require the fund to be maintained at an adequate level.

The commission plans to study whether Constellation should be forced to pick up all or a portion of future decommissioning costs.

"Constellation got the assets, they got the power plants, and ratepayers held on to probably the most significant liability associated with the plants," Larsen said.

Constellation disputed most of the report's findings, saying stranded costs had no impact on customer bills under the settlement's terms. That position seems to be supported by past testimony from the PSC's staff in an unrelated case. The company also pegged the benefit to customers from the 6.5 percent rate cut at more than $1 billion, rather than the $315.6 million stated in the report.

The company also said the diversion of stranded costs to offset BGE's losses on power purchases did not affect customer bills and benefited the regulated utility's bottom line.

"The report's criticism of these transactions falls under the category of 'No good deed goes unpunished,'" the company said in a statement.

The report revives a long-simmering argument over the value of BGE's former power plants, which were transferred to Constellation in 2000 at book value. The stranded costs were intended to compensate the company for the difference between the plants' book value and their estimated market value, which was thought to be lower.

During negotiations with the state in 1999, the company initially argued it should be allowed to collect $1.1 billion in stranded costs. By contrast, the Office of People's Counsel, which advocates for utility customers, countered that ratepayers should be compensated $1.5 billion for the power plants - a more than $2 billion difference of opinion.

As it turns out, both sides were wrong.

The value of the plants - particularly Calvert Cliffs - has soared along with the rising price of electricity. The substantial reversal has prompted calls by some lawmakers and others for Constellation to return the money it collected for the plants.

Constellation said that argument doesn't take into account the $2.7 billion it will spend on the plants between 2000 and 2010. Under traditional regulation, those costs would have been paid by ratepayers.

Sun reporter Laura Smitherman contributed to this article.

PSC findings

A PSC report criticizes the 1999 settlement that implemented deregulation for BGE customers

Key points

Cost of settlement to BGE customers: $1.5 billion

Customer benefit from rate cuts: $315.6 million

Stranded costs, which compensate BGE parent Constellation Energy Group for taking on the plants in a deregulated environment:

- $975 million paid to Constellation for value of BGE plants

- Claims that more than half that amount diverted to offset BGE losses from buying power from Constellation

[Source: PSC report]

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