Md. utility, Calif. settle

State to drop complaint after Constellation unit agrees to pay $2.5 million

Power contract is shortened

Sacramento had alleged prices were manipulated

April 24, 2002|By Dan Thanh Dang | Dan Thanh Dang,SUN STAFF

In a deal that reduces its legal, regulatory and fuel cost risks, Constellation Energy Group Inc. has reached a new long-term agreement to sell all the electricity produced at its unfinished High Desert Power Project to the California Department of Water Resources.

The California agency will pay Constellation's Power Source unit $12.1 million per month for almost eight years, or $1.1 billion.

A comprehensive settlement reached late Monday also releases Constellation from a complaint the state filed with the Federal Energy Regulatory Commission in February against companies with long-term power contracts with the California Department of Water Resources.

The state wants the federal agency to declare the contracts illegal on the basis that the companies manipulated the market.

As part of the agreement, Constellation agreed to pay $1.25 million into a California school and public buildings energy retrofit fund, and another $1.25 million to the state attorney general to extricate itself from a legal battle that could result from an investigation into electricity pricing.

"We were pleased to successfully conclude our negotiations with the California Department of Water Resources to sell the output of our High Desert plant," Chief Financial Officer E. Follin Smith told energy analysts during a conference call.

"As we've said before, the state of California is a very important customer. ... Most importantly, we have meaningfully reduced our regulatory, legal and natural gas risks."

At the height of the state's energy crisis a year ago, California signed long-term power contracts with Constellation and other utilities to lock in future prices and supplies.

But as the crisis diminished, the state discovered that it had contracted for more power than needed and was locked into higher prices at a time when the wholesale cost of electricity was dropping.

Various California agencies joined the governor and attorney general in pressuring companies to renegotiate those contracts, accusing them of unfairly taking advantage of the state's power problems.

California renegotiated contracts with Constellation and four other power companies to save about $3.5 billion by reducing the lengths of the contracts.

The California Department of Water Resources reduced its 8 1/2 -year contract with Constellation by six months.

In addition to buying all the output - about 750 megawatts, or enough to power 750,000 homes - from Constellation's High Desert plant in Victorville, Calif., the California agency would reimburse the company for natural gas fuel costs over the life of the contract.

The agency's monthly payment to Constellation will start when the High Desert plant begins operation, which is scheduled for July 1, 2003. In the previous contract, the agency had a right to terminate the contract if the plant didn't begin operating by April 2004.

"The risk that we could lose everything has been largely eliminated," said Smith, Constellation's CFO.

As part of the deal, the Department of Water Resources also would purchase an additional 400 megawatts from Constellation Power at a fixed price of $55 per megawatt-hour from May through October this year and for the same months next year.

The California agency already is purchasing 200 megawatts from Constellation Power through a contract covering April 2001 through June 2003.

"We are pleased to be able to meet the objectives of a very important customer in a mutually beneficial way," said Constellation Chief Executive Officer Mayo A. Shattuck III.

Constellation's stock price closed at $31.70, up a cent.

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