Deregulation deck stacked against ratepayers

March 15, 2006|By JAY HANCOCK | JAY HANCOCK,SUN COLUMNIST

Don't blame deregulation for the 72 percent pop in electricity bills that Baltimore Gas and Electric customers will see after July 1, says BGE.

"It is not deregulation that has failed," BGE spokesman Rob Gould said on WYPR radio last week. "The real cause for the price increase is the world energy market."

But for all of BGE's and parent Constellation Energy's portrayals of themselves as victims of high energy costs, the facts show not only that regulation would have softened this kind of rate shock but that deregulation was fixed from the start in their favor.

For one thing, deregulation was what exposed BGE ratepayers to the world energy market by cutting them off from the low-cost coal and nuclear generators BGE used to own.

On Sunday, I wrote that electricity bills in Michigan are a third less than what BGE's will be because regulators stopped deregulation short and forced Detroit Edison to keep its coal and nuclear plants, passing the low cost to households.

This column revisits the heart of deregulation - the 2000 sweetheart deal that shifted BGE's generators to parent Constellation and that is now being re-examined by the General Assembly.

The transaction - basically a paper shuffle - morphed what should have been benefits for households into profits for Constellation and bonuses for its bosses.

The generation plants changed hands on another fateful July 1 - July 1, 2000. One day they were owned by the heavily regulated BGE. The next day they were owned by Constellation, which could then peddle their megawatts to anybody and eventually force BGE and ratepayers to bid for juice in the open market.

Of course, you're saying, Constellation must have paid BGE ratepayers a fair price for those valuable facilities.

When Potomac Electric Power Co. sold its generation plants to Mirant Corp. in 2000, the resulting $424 million capital gain paid for, among other things, basically seven weeks of free electricity for Pepco customers in Maryland.

BGE customers, alas, got no such gain. For some reason Constellation got to take over BGE's plants at book value. No cash changed hands. No premium was paid. No gains flowed back to customers.

In fact, it was just the opposite. You, the electricity customers, paid Constellation to take the valuable plants off BGE's hands!

Like other power companies, Constellation argued that the plants would become uncompetitive after deregulation and that electricity customers should compensate them, essentially helping to pay the facilities' mortgages.

The result was the "stranded-cost" charge, added to every bill you paid for the last six years. The charge, which disappears after June, has put an extra half-billion dollars in Constellation's pocket.

Of course the plants didn't become uncompetitive. They soared in value like Google stock. As rising gas and oil prices have driven up the market price for megawatts, efficient coal and nuclear plants have become gold mines.

The most striking example is the Calvert Cliffs nuclear generation plant, which Constellation put on its books in 2000 for $1 billion. Last fall Calvert Cliffs was worth between $2.6 billion and $4.3 billion, according to consultant Global Energy Decisions, which calculates "blue book" values for generation assets.

And don't forget that most of the half-billion-dollar stranded-cost bailout that Constellation collected was linked to Calvert Cliffs, so its cost basis for the plant is actually even lower than $1 billion.

That's a ton of money ratepayers left on the table.

No wonder Constellation's profit went up 45 percent last quarter. No wonder Constellation bosses are seeing millions of dollars in stock option gains.

To be fair, there are several things to be said on Constellation's behalf.

Along with the 2000 transfer of the generation plants came a 6.5 percent rate cut for BGE customers, which lasts until July 1. Even so, Pepco customers in Maryland got the same rate cut - plus free kilowatts from the sale of Pepco's generation plants. The 6.5 percent rate cut should have been just a start.

Another valid point Constellation will make is that capital investment by current shareholders and management-driven efficiencies are key reasons for the huge jump in its plants' value.

Across the country, new operators "have really turned around what had been relatively mediocre performance among nuclear plants in the past," says Gary Hunt, president of Global Energy Advisors, a Global Energy Decisions affiliate.

No doubt. But that doesn't explain all of the gains made by Constellation. And it doesn't change the fact that ratepayers got a deal that amounted to having to pay down the mortgage but not being able to benefit when the property doubled or quadrupled in value.

Stranded cost? I call it a stranded rate cut for BGE customers.

Come on, Constellation. Give back the half-billion - as legislators have begun discussing - to soften the 72 percent rate shock. And admit that deregulation has worked a lot better for you guys than us.

jay.hancock@baltsun,com

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