Constellation power shift

Risk: Constellation Energy 's planned split has raised questions about the transfer of BGE's electric plants and the utility's future.

September 09, 2001|By Dan Thanh Dang | Dan Thanh Dang,SUN STAFF

When Constellation Energy Group Inc. splits from Baltimore Gas and Electric Co., planned for the end of the year, it will begin life as a $6 billion electricity supplier with a powerful advantage: 10 BGE electric plants, including the nation's only relicensed nuclear station.

Constellation didn't pay billions of dollars to buy the valuable assets on the open market or risk losing out to a higher bidder. Instead, it got the plants as part of the plan to deregulate electricity in the Baltimore region.

It's a deal that boosts new Constellation's arsenal of electricity to sell nationwide, enhancing its chances of becoming a major player in an extremely competitive, high-risk and, it hopes, lucrative merchant power business.

But the same deal leaves a highly leveraged BGE with $2 billion in debt, less cash and a limited ability to grow.

To serve its 1.1 million residential customers, the utility will have to pay for the electricity it once produced - about $1 billion a year. BGE has locked in supplies until 2006 through fixed-rate contracts.

State regulators signed off on the plant transfers months before Constellation Chairman and Chief Executive Officer Christian H. Poindexter announced the ambitious plan to split into two independent companies: Constellation Energy and BGE Corp., in which BGE will be a subsidiary.

Company officials maintain the proposed separation plan is good for customers, shareholders and Baltimore, which will be home to both companies.

Critics contend the deal is too favorable to the new Constellation, while more neutral observers say it's the new Constellation that bears more of the risk.

But regulators worry that a financially weakened BGE, cut off from the deep pockets of its powerful corporate parent, could falter.

So concerned was the Maryland Public Service Commission that it held four days of hearings that concluded last month, during which its chairman wondered aloud whether the asset transfer "was premised on faulty facts."

And just 10 days ago, the state People's Counsel recommended that the commission delay the separation until Constellation provides firm commitments to restore BGE's capital structure.

"At the time of the asset transfer, this commission was very wary of the debt that would be left with BGE," PSC Chairman Catherine I. Riley told top company executives during the hearing.

"It was committed to that you guys would restore BGE's equity ratio within four or five years. When that commitment was made, did anyone envision that this separation would occur? Is there any reason why we [the PSC] should have anticipated separation?"

The PSC is expected to issue a decision next month.

Company officials vehemently deny that new Constellation is coming into being at BGE's expense. "We are very confident that BGE will be in a very strong position financially," said Paul J. Allen, Constellation vice president of corporate affairs.

And credit-rating agencies have reacted favorably, reflecting the view that a distribution company like BGE is less risky than a merchant power company like new Constellation. After announcement of the pending split, Standard & Poor's placed BGE on credit watch "with positive implications to reflect that once its ties to Constellation's generation business have been severed, BGE's business profile will improve."

Company officials say they have gone out of their way to minimize BGE's risks. Just last month, BGE entered into long-term, multimillion-dollar contracts with affiliate Constellation Power Source and Allegheny Energy Supply Co. LLC to lock in wholesale power supplies for residential customers at current prices through July 1, 2006.

Company officials said the new contracts eliminate the threat that the utility could be caught in a squeeze between a rise in power costs and a rate freeze in effect until that date.

But while Constellation will continue cooperating with the PSC review, company officials maintain that the agency has no authority over the separation.

The crucial decision faced by the PSC comes as it attempts to maintain control over BGE's future and ensure the region's power supply under deregulation.

It is a scenario being played out across the country. Once-staid utilities are evolving at a dizzying pace under deregulation and as a result, industry experts say, regulators - let alone consumers - are struggling to understand and keep up with critical changes.

In Constellation's case, said one expert, the beneficiary of the changes is clear.

The transfer of the plants on July 1, 2000, was "a very sweet deal for Constellation, no question," said Stephen G. Hill, a consultant hired by the state People's Counsel to examine the split.

"The concept that BGE had nothing to do with the new company's future is a fiction that company executives want you to believe. But for years, BGE was a fully integrated utility that owned plants built with ratepayer dollars. The utility was the cash cow.

"There is no return"

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