Affiliate of BGE to supply Calif. grid

Constellation Power signs a 10-year deal worth $3.6 billion

New plant due in 2003

March 12, 2001|By Dan Thanh Dang | Dan Thanh Dang,SUN STAFF

A national affiliate of Constellation Energy Group Inc., the parent company of Baltimore Gas and Electric Co., signed a $3.6 billion, long-term power sales contract yesterday with the California Department of Water Resources to supply the state with electricity for 10 years.

Starting next month, Constellation Power Source will supply an undisclosed amount of electricity directly to the department, the state's designated power buyer, on a 24-hour basis until Constellation's new High Desert Power Plant begins operating in July 2003. Constellation will then sell about 800 megawatts of electricity to the state.

According to an announcement last week, Constellation Power is one of about 20 companies negotiating deals with California, which has recently experienced soaring energy costs and undergone rolling brownouts to ease the strain on its power supply. In all, the contracts would lock in about 6,000 to 7,000 megawatts for the summer, enough electricity for as many as 7 million homes.

Constellation is to begin construction early next month on a combined-cycle gas-fired plant on 25 acres in Victorville, about 60 miles northeast of Los Angeles. The High Desert Power Plant, the first new major station in Southern California in more than a decade, will generate about 750 megawatts of electricity and serve 500,000 homes.

Eric Grubman, co-president of Constellation Energy Group, said yesterday that "we are very pleased that Constellation's efforts to develop generation capacity in California are coming to fruition. We have been working on the High Desert power project in Southern California for several years.

"Despite recent turmoil in the Western markets, we believe that cost-effective, energy-efficient power plants can be sited in California at prices which are acceptable to both investors and consumers."

David Burks, a utilities analyst with J. J. B. Hilliard, W. L. Lyons Inc. in Louisville, Ky., said: "Clearly, any time you hear the words `California' and `energy' in the same sentence, your ears tend to perk up and you wonder whether it will prove to be a sound move.

"I think dealing with DWR, there's less risk on the surface than if they were selling power to the utilities. We're also beginning to see the situation in California stabilize somewhat, and the outlook is a bit more optimistic than what we saw a couple months ago.

"Constellation already sells 100 to 150 megawatts to the state under long-term contracts, so they have experience with the California power market. That experience should help, and the demand for energy will continue to be significant, so why not take advantage of that?"

But even with new contracts, California's current power crisis will not disappear, according to a report released last month by Cambridge Energy Research Associates.

CERA predicts that at least 5,000 megawatts of new generating capacity is needed to restore balance to California's power grid. The report also warned that long-term power contracts are likely to "create risky, potentially above-market obligations for the state in the future."

The crisis is blamed partly on California's flawed 1996 electricity deregulation law, which required state utilities to sell their power plants and buy energy on the wholesale market. The problems started last summer when the price of power soared and utilities were not allowed to pass the increases along to consumers.

When Southern California Edison and Pacific Gas & Electric Co. racked up billions of dollars in debt and threatened to file for bankruptcy - leaving consumers struggling with higher electricity prices and rolling blackouts - the state began buying power to keep the lights on in the state.

Critics of California's long-term deals say the state could be committing itself to pay too much for at least a decade, especially if the price for electricity drops when new power plants are built and prices for natural gas decline.

If that happens, suppliers such as Constellation Power could do extremely well, Burks said. But if the price for electricity soars over the next decade, Constellation Power would be prevented from raising the price for power it sells.

"It's not easy to say with foresight that this will be a tremendous long-term win-win situation," Burks said. "It can work out to their advantage or disadvantage."

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