For the first time in three days of grueling testimony, and as more details emerged, financial and economic experts for the state expressed confidence yesterday in a proposed plan to help Baltimore Gas and Electric Co. pay down billions of dollars in debt if it is allowed to split from its parent later this year.
The turn of events was the first positive sign for Constellation Energy Group Inc. in three days of hearings held by the Maryland Public Service Commission to determine the financial health of its regulated utility, BGE, in the event of a separation.
But in granting support to the company's confidential methods to pay its debt, the experts also warned that, before the separation is approved, the commissioners should gain agreements from Constellation to ensure that the plan will be carried out.
Constellation announced in October that it would split into two independent, publicly traded businesses that would create a new Constellation, a fast-growth national power producer and marketer with $6 billion in assets, and BGE Corp., a slow-growing regional delivery company with $5.5 billion in assets that would include BGE.
But the company has been criticized for leaving BGE with too little cash flow and about $2.4 billion in debt - part of which was related to the transfer of BGE's power plants to a nonregulated affiliate, Constellation Power Source, on July 1, 2000. Constellation Power would be a subsidiary of new Constellation after the split.
The regulators worry that such high financial risk could make it difficult for BGE to meet its obligation to provide electricity to consumers at prices that are frozen until 2006 under last year's deregulation agreement.
"They [Constellation's proposals] appear to significantly reduce the strain on BGE in the next couple of years," said financial consultant Stephen G. Hill, a key witness for the people's counsel, who represents consumers' rights in utility matters. "It's a reassuring plan. ... With the new information the company provided, I have considerably more comfort that the company has the financial capability to help BGE. The commission's responsibility is to make sure they do what they say they will do."
"There is no guarantee that that will be done," Hill said. "There have been considerable commitments made here from the company saying that they won't let their flagship [BGE] go down. I believe that, but there are no guarantees."
Suggestions for paying
Similar concerns were expressed by a consultant from the Maryland Energy Administration and a regulatory economist from the PSC staff, who also testified yesterday. Each suggested a variety of ways to help pay off BGE's debt, such as:
Ordering BGE to retain 90 percent of the $528 million in stranded costs that Calvert Cliffs Nuclear Power Plant will receive after the split. Stranded costs is the amount of money BGE was allowed to collect from customers for investments in power plants that were transferred to Constellation Power.
Setting a suitable equity and debt ratio that BGE must meet in a certain amount of time after the separation, when the utility becomes a distribution company that focuses on delivering electricity and gas to customers.
Demanding assurances, possibly written agreements, from company officials that would be enforceable if either company fails to meet its commitments.
Asking for additional reports, including detailed cash-flow statements, to be filed quarterly with the PSC.
"My belief is that the commission has the authority to approve separation," said David J. Effron, an accountant and regulatory consultant also hired by the People's Counsel. "If separation could potentially impact the utility and prices the utility charges, I think the commission could make these proposals as part of the conditions of the separation before approving it."
It was not clear how the commission would enforce such conditions, however.
Hill also said, "Constellation is simply a bigger fish right now. With its bigger size, it has access to more capital and resources. They can draw on that to help BGE, if need be. Once they split, that support is no longer available."
Company officials insisted yesterday that they have gone above and beyond the call of duty to pay off some of BGE's debt and will continue to do so.
They also said that, as a distribution company, BGE will have fewer risks than if it were still producing and selling electricity.
A senior company official surprised the commissioners yesterday with a key piece of information.
Thomas E. Ruszin Jr., Constellation's and BGE's treasurer, said the company has already fulfilled its obligation to pay about $1.1 billion in debt that was left with the utility when the power plants were transferred last year. Commissioners roundly criticized the company Monday for failing to keep that pledge.
In statements and documents introduced so far, Constellation's power plant subsidiaries had paid off $366 million of BGE's debt by issuing inter-company promissory notes and by transferring to the subsidiaries $278 million in pollution-control debt. Also, the power plant subsidiaries have been paying a dividend to the holding company in order to allow BGE to retain $164 million in earnings.
But in new information provided to the commissioners, Ruszin said that about $470 million in debt associated with two subsidiaries - Constellation Investments Inc. and Constellation Real Estate Group Inc. - will be left with the new Constellation after the split. Those two subsidiaries will join BGE Corp. with no debt, he said.
"We committed to that in June," Ruszin said. "We are not backing down from that.
"I'm going to get BGE down to an equity ratio of 43 percent. That is my goal. I will meet that commitment. The company will meet that commitment."