Intervention poses a mix of problems

March 25, 2006|By PAUL ADAMS | PAUL ADAMS,SUN REPORTER

A threat by Maryland lawmakers to intervene in Constellation Energy Group's merger with a Florida utility could damage the company's standing in credit markets, undermine the state's business reputation and thwart the authority of the state regulatory agency, various outside experts said yesterday.

The move has few, if any, precedents in recent history, some outside observers said.

The proposed intervention comes as state utility regulators nationwide are increasingly worried that their independence is being threatened by politicians who disagree with the decisions they make in regulatory matters. Maryland's Public Service Commission has come under fire recently from lawmakers who say it hasn't done enough to protect consumers from rate increases.

"I can't think of a case recently where a legislature has actually acted on its own on a merger," said Charles Gray, executive director of the National Association of Regulatory Utility Commissioners.

Lawmakers have proposed a plan to require the General Assembly's approval of Constellation's $11.5 billion merger with FPL Group Inc. in Juno Beach, Fla. Lawmakers want to use the move as leverage to extract concessions from the company on its pending rate increases. Constellation's regulated utility, Baltimore Gas & Electric, is poised to impose a 72 percent rate increase on customers once price caps that have been in place for six years expire in July.

Legal experts say extracting concessions from companies seeking approval for a merger is routine for state utility commissions and the Federal Energy Regulatory Commission. Those agencies commonly require companies to cut electric rates, maintain local employment or take other steps to protect consumers as a condition for winning regulatory approval.

What's unusual in this case is that politicians are the ones exercising the authority. Utility commissions were created in most states to provide an independent regulatory authority with professional staffs who are supposed to make fact-based decisions outside the political realm.

But some argue that such legislative oversight should be expected in the current environment of rising electric rates.

"Unfortunately for BGE and FPL, this transaction came at a time when electric restructuring is entering a new phase in Maryland and these price increases are coming along," said Linda Stuntz, who was deputy energy secretary in the first Bush administration. "So I think it's perfectly understandable that the public's representatives ... are saying, well, what can we do about this?"

However, some say the independence of utility commissions has been increasingly called into question as lawmakers in several states struggle to deal with consumer angst over electric rate increases. In Illinois, Gov. Rod R. Blagojevich wrote to utility commissioners in summer, saying that approval of a plan to allow two utilities to hold reverse energy auctions to procure power supply as part of the move toward free markets would be tantamount to "gross incompetence." Similar auctions were in held in Maryland, New Jersey, Delaware and other states, resulting in soaring prices.

A short time later, the head of the state's regulatory arm resigned under pressure.

"The appropriateness of linking the merger [with rate hikes] is something I think legislators should think about, because what kind of message is that sending to all businesses in Maryland?" said Christine Tezak, an electric industry analyst for investment firm Stanford Washington Research Group. "It's saying, `If we don't like you for whatever reason, we're going to mess with your deal.'"

paul.adams@baltsun.com

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