High-stakes energy debate hardly over

The Baltimore Sun

Constellation Energy Group and lawmakers may have resolved their legal dispute over utility rebates, but the high-stakes debate over how Maryland's energy industry will buy and sell power in the future is just getting started.

Even as they voted in favor of a $2 billion settlement with the company Monday night that provides a one-time $170 rebate to consumers, key lawmakers were discussing the possibility of returning to Annapolis in a year to undo electric deregulation. The outcome of their deliberations could alter the financial landscape at a time when Baltimore-based Constellation and others are considering whether to invest billions of dollars in new power plants to help solve Maryland's projected energy shortfall.

Some industry analysts said yesterday that the lack of an agreement on re-regulation could factor into Constellation's decision over whether to build a new nuclear reactor at Calvert Cliffs in Lusby. It also could affect other proposed power plant projects, which some argue will be critical to preventing electricity rates from rising further. Maryland imports about 30 percent of its electricity - a shortage that has helped drive wholesale energy prices up 85 percent over pre-deregulation rates.

"Generally speaking, the more uncertainty there is, the more likely a decision like that will be put off or delayed," said Paul Patterson, an analyst with Glenrock Associates in New York.

The deal reached Monday seems designed in part to prevent that from happening. It states that Constellation, the parent company of Baltimore Gas and Electric, will give preference to Maryland when deciding where to build a new nuclear plant. The company had said previously it might build in New York to avoid Maryland's volatile political environment.

The settlement also includes a provision allowing an investor to buy up to 20 percent of Constellation's shares without triggering a regulatory review by the Public Service Commission. That could clear the way for Paris-based EDF Group, which has partnered with Constellation to develop nuclear power plants in the United States, to provide cash to finance the Calvert Cliffs project.

While remaining vague about its plans, Constellation said yesterday that the deal with lawmakers is a step forward.

"Looking ahead, BGE customers gain a number of tangible benefits as does Constellation Energy, which will be better positioned to attract the capital necessary to invest in key strategic initiatives," said Rob Gould, a spokesman for the company.

Patterson and other industry analysts saw benefits in the deal, despite the unresolved issues. And Fitch Ratings, a major credit-ratings agency, took Constellation off credit watch negative yesterday in light of the agreement with lawmakers. Some analysts see the deal as an opportunity for the parties to alter the tone in the re-regulation debate.

Gov. Martin O'Malley's administration is trying to walk a fine line between collaborating with Constellation, while still getting consumer-friendly changes to the state's regulatory scheme.

"It means working to ensure we are increasing generation, including working with Constellation and the federal government on that third reactor at Calvert Cliffs, but doing so in a way that is fair to ratepayers," said Rick Abbruzzese, an O'Malley spokesman.

The PSC has put forth a series of potential regulatory fixes in recent reports to lawmakers. Key among them is a plan to partially re-regulate the industry by requiring utilities to enter into long-term contracts with power plants. The idea is to spur construction of new generation by providing a guaranteed stream of revenue for suppliers, who would have to compete for the contracts and build the plants.

Proponents say it is an improvement over the current system, in which utilities buy power several times a year through a competitive wholesale bidding process. Critics complain the so-called energy "auctions" are dominated by too few players and yield unusually high prices. Constellation is by far the dominant bidder, winning the right to supply about three-quarters of BGE's electricity. BGE is Maryland's largest utility with 1.1 million customers.

"Just having one competitor doesn't make things competitive," said Robert F. McCullough Jr., an energy consultant who studies power markets.

Lawmakers considered going much further by requiring future power plants built in Maryland to be regulated much as they were in the past. The provision was attached to the Constellation settlement legislation, nearly scuttling the deal. The legislation passed when lawmakers agreed to strip it from the bill.

Constellation opposes re-regulation, arguing that it will disrupt competitive energy markets and place the burden for new plant costs on the backs of ratepayers. Under deregulation, Constellation shareholders bear the costs and risks of building and owning power plants. Retail energy suppliers - who compete to take customers from BGE - say either re-regulation option under consideration would drive business away from the state and take away ratepayer choice.

"In our view, that's going to be a very big detriment to the market," said Leah Gibbons, Maryland chairwoman for the Retail Energy Supply Association, a trade group. "Worse than that, it's a detriment to customers. Either option puts all of the risk of building generation onto ratepayers and forces ratepayers to pay for all those decisions."

Steven B. Larsen, PSC chairman, said the panel will spend coming months analyzing the options so that lawmakers can make a decision based on solid research. Critics have said that lawmakers passed deregulation in 1999 without knowing what they were getting into.


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