The Maryland Public Service Commission hinted yesterday that it might seek written assurances from Constellation Energy Group Inc. and require certain conditions to be met before allowing the company to separate from its regulated utility at the end of this year.
That option emerged as the five-member commission sharply questioned high-ranking Constellation executives for several hours during the first day of a three-day hearing to determine the financial health of Baltimore Gas and Electric Co. if the proposed split is allowed.
Constellation announced in October its ambitious plan to split into two publicly traded companies, creating new Constellation, a fast-growth national power producer and marketer, and BGE Corp., a slow-growth, regional delivery company that will include BGE.
Specifically, regulators are concerned about BGE's ability - after the split - to provide electricity to consumers at rates that are frozen until 2006 under last year's deregulation agreement. Pointing to testimony that shows BGE will have less cash flow and will carry about $2.4 billion in debt, the commissioners pressed for guarantees that BGE would not seek rate increases because of any financial difficulties that might occur as the result of the separation.
"The issue here today is the financial stability and exposure of the regulated utility, BGE, after the separation," PSC Chairwoman Catherine I. Riley told Constellation and BGE officials. "How is the regulated utility going to cover unanticipated or potential commitments?"
Riley wanted to know specifically that BGE officials would not "be back in front of us for a rate increase because `our debt level is so high or our cash flow is too low,' correct?"
Commissioner Ron Guns added later, "The concern I have is that we don't walk out of here allowing something to happen that will bite us three years down the road."
Constellation Chairman and Chief Executive Officer Christian H. Poindexter, Vice Chairman Edward A. Crooke, and BGE President and CEO Frank O. Heintz took the stand for more than five hours yesterday to elaborate on prior testimony the company filed with the PSC.
Much of the questioning focused on how BGE will return itself to a more reasonable capital structure after the split. The commissioners also wanted to know how BGE will pay down debt it carries as a result of transferring its power plants on July 1, 2000, to its current affiliate, Constellation Power Source, which will join the new Constellation after the split.
At this point, the new Constellation's subsidiaries have paid off about $644 million of BGE's debt, according to testimony already filed.
Riley reminded the three men that, as part of a compliance letter that Constellation wrote to the PSC to seek approval of the asset transfer, the company agreed that it would pay down $1.1 billion of BGE's debt. However, because of an IRS ruling that prevented Constellation from assuming much of that debt, company officials said that BGE Corp. would use a variety of options to pay down BGE's debt after the split.
Company officials said that would include, but would not be limited to, selling assets of nonregulated subsidiaries if necessary.
But Riley pressed the men about what Constellation has done to help BGE pay down debt.
When Poindexter replied, "We've been hard at it up until now," Riley snapped, "You seemed hard at it until the [announced] split. Now you're walking away. Am I wrong? ... You don't have the view that the generation assets are now abdicating their commitment to paying off that debt?"
Crooke, who will become BGE Corp.'s chairman and chief executive after the split, assured regulators that neither he nor Heintz would seek any rate increase "because we can't meet obligations because of separation."
"The company absolutely needs flexibility to adequately manage its resources to protect BGE's viability," Crooke said.
"It makes no economic sense for BGE Corp., myself or for the board of directors for BGE Corp. to manage BGE in a way that is detrimental to BGE, because that would also be detrimental to BGE Corp.
"It makes all economic and management sense for us to ensure the financial viability of our premier asset," Crooke said.
Continuing her aggressive line of questioning, Riley also asked why most of the $528 million that BGE was allowed to collect from ratepayers for stranded costs - repayment to the utility for the expense of building power plants that it no longer owns - was not used to pay off BGE's debt. After the split, about 90 percent of the stranded costs will go to Calvert Cliffs Nuclear Power Plant, which also will be a subsidiary of the new Constellation.
Heintz replied, "That was not a particular part of our discussion."
Riley hammered on the idea that while Constellation received much of the benefits of the power plant transfer, BGE retained most of the risks. For example, Riley said, BGE now spends about $1 billion a year paying for electricity it used to produce in order to service its customers.
Riley said that had the PSC known that Constellation was planning such a split when the commission agreed to the transfer of plants at book value in June 2000, it would have demanded more stringent conditions on both companies. She did not elaborate.