Constellation Energy Group Inc.'s ambitious strategy to split into two multibillion-dollar companies later this year will leave its 185-year-old regulated utility with high financial risk, according to a financial consultant retained by the state to review the proposal.
In an examination of the much anticipated separation plan, Stephen G. Hill said in testimony filed yesterday with the Maryland Public Service Commission that consumer rates could also rise because Baltimore Gas and Electric Co. will be left with too little cash flow and too much debt for the utility to handle without the support of its parent company.
In addition, Hill advised that BGE should be required to submit - before the split takes place - a definite plan to restore the company's capital structure by the end of 2003.
Otherwise, should the utility be hit with unexpected difficulties such as a severe ice storm, hurricane or power supply price spikes, Hill said, "the low equity cushion and high fixed-income burden currently imposed on the company could endanger system reliability and, perhaps, viability."
Hill is principal of Hill Associates in Hurricane, W.Va., specializing in the finances of regulated industries. He was retained by the Maryland Office of People's Counsel, which represents consumer rights in utility matters.
The strongly worded recommendation is the first potential obstacle from state officials that the company has encountered since announcing its complicated plan in October. Under that plan, Constellation would become a fast-growth, unregulated, national seller of wholesale power with assets of $6 billion; and BGE Corp. would be a $5.5 billion regional retail and distribution company that includes BGE.
Hill's testimony was part of two filings sent to the PSC yesterday, the first deadline for outside parties to submit testimony about Constellation's plan. The other was submitted by the Maryland Energy Administration, which asked for assurances that customers would not pay for Constellation's business plan or suffer with higher rates. Both filings stopped short of opposing the separation.
"The purpose of this filing is to point out concerns we have at this time that could potentially have an adverse effect on ratepayers in the future," said Sandra M. Guthorn, deputy people's counsel.
The PSC, which is the state agency that oversees all utilities in Maryland, is conducting a comprehensive examination of the separation and will hold hearings on the issue from July 31 to Aug. 2. But while Constellation has fully cooperated with the review, company officials maintain that state regulators have no authority over the transaction.
"We're confident that BGE Corp. will be a financially strong corporation, and we look forward to demonstrating that conclusively in our response to the PSC on July 23," Constellation spokesman Michael W. Delaney said. "BGE's fundamental obligation is to provide safe, reliable and economic electric and gas delivery service. We believe separation as envisioned by the Maryland electric restructuring law and BGE's settlement agreement with the state will result in benefits.
"After the separation, BGE will continue its long tradition of providing excellent service to Central Maryland."
In its May 9 report to the PSC, BGE stated that the separation "will not result in any adverse effect on BGE" and will actually provide "benefit to BGE." Moreover, BGE stated that the separation will "generate benefits to the residents and citizens of Maryland."
But testimony from the consultants in the filings cast some doubt on BGE's position.
To prepare for deregulation, BGE transferred its non-nuclear generating plants to Constellation Power Source Generation Inc. and its nuclear plant to Calvert Cliffs Nuclear Power Plant Inc. on July 1, 2000. The new Constellation will own $4 billion of generating plant assets formerly owned by BGE, which will have to buy power through long-term contracts to meet its service obligations to consumers.
But in doing so, Hill said, "BGE will retain all the debt used to finance those transferred assets ... BGE's capital structure, as a result of the separation, is highly leveraged for a utility operation and imposes unnecessary financial risk on the utility's regulated operations."
And while the company has indicated its intent to restore BGE to its pre-separation financial status, Hill said, Constellation's "projected cash flow data for BGE through 2003 indicate that only a small reduction in BGE's debt load is probable. ... The debt burden at BGE will not be alleviated over the next few years."
A second consultant hired by People's Counsel and an independent consultant economist hired by the Energy Administration also voiced concerns that consumers would end up paying for the cost of the transaction, the actual cost of separation.
Matthew I. Kahal, an MEA consultant who specializes in energy economics, public utility regulation and financial analysis, said the separation into two entities is a choice made by the company, which wants to enhance shareholder value. And while the MEA does not oppose the move, it is not required and should not be allowed to affect consumers through the rates they pay.
Sun staff writer Meredith Cohn contributed to this article.