Shield BGE from being drained by CEG deal


To the extent that many state legislators have considered the looming merger of Constellation Energy with Florida's FPL Group, it's with an eye to holding the deal hostage to relief from 72 percent electric-rate pops for BGE customers.

But the marriage should be scrutinized - heck, dissected - for its own sake. In the face of negligent state regulators and the weakest federal protection in decades against financiers draining utilities, letting the merger sail through for mere rate relief would be crazy.

Before it approves the deal, Maryland needs to put Constellation's Baltimore Gas and Electric Co. utility inside a bulletproof financial shield such as the ones Wisconsin and Oregon have installed over their electric companies.

FOR THE RECORD - Portland General Electric, the electric utility in Portland, Ore., was misidentified in Jay Hancock's column in Sunday's Business section.
The Sun regrets the errors.

It's called "ring-fencing." It protects ratepayers from unwittingly financing unregulated investments by a utility and its holding company or from having to bail the deals out when they go bad.

Oregon's ring fence all but immunized Portland Gas & Electric from the bankruptcy of its former parent, Enron Corp.

Without such a firewall PG&E's assets might have been raided to pay people Enron cheated and other creditors, resulting in huge expense for ratepayers or taxpayers.

A better ring fence might have saved PNM Resources, a New Mexico energy outfit, from what news outlets describe as millions in losses from a hedge-fund investment. PNM has reportedly accused local rival Southwestern Public Service of unfairly charging ratepayers for unregulated marketing costs, another ring-fence issue.

A good ring fence might have kept Kansas' Westar Energy from loading up on debt, diversifying into a poorly performing home security company and flirting with bankruptcy.

Now that Congress has scrapped the Public Utility Holding Company Act (PUHCA), a federal ring fence that has limited this kind of nonsense since 1935, states are worrying whether their own ring fences are strong enough.

"These state commissions are pretty much the only remaining line of defense," says Lee Cullen, a Wisconsin energy lawyer who helped write that state's ring-fence law.

Maryland especially should worry.

The Constellation/FPL deal, which PUHCA would have banned, is one of the first post-PUHCA electric mergers. Again we are lab mice in the deregulation experiment, which in theory is supposed to free up competitive capital to bring efficiencies to ratepayers.

But regulators have done next to nothing to strengthen Maryland's ring fence since the lapse of federal protections.

Oh, they've looked at it. The Public Service Commission studied the matter for more than a year and last month - this is amazing - ordered utilities to file annual reports on relations with affiliates.

And that's about it. No substantial new restrictions. Nothing like Oregon and Wisconsin. The commission's staff warned that broad ring fences might "unduly inhibit" utilities and concluded that fence holes should be dealt with "on a case-by-case basis."

My favorite clause in the regs is this: "A utility shall notify the Commission within 7 days after the utility or its affiliate ... files for bankruptcy."

Have no fear, consumers, the PSC is right on top of things.

Constellation officials say they already strictly separate BGE and its sister companies. No Constellation debt is secured by BGE assets, says spokesman Lawrence McDonnell. The companies have separate debt ratings and bonds and need regulatory approval to borrow money.

"We do believe that there are numerous and very adequate protections," McDonnell says.

I don't believe it, especially since out-of-state owners would bring a whole new set of risks to BGE.

A better Maryland ring fence would include a separate BGE board of directors, as proposed by Baltimore Del. Brian K. McHale.

It would include a whole cupboard of ingredients such as those adopted recently by Oregon before it allowed the sale of the state's second-biggest electric company. They include: separate real estate for the utility, strict limits on dividend and asset transfers, mandatory capital ratios and ability to block a voluntary bankruptcy, says Bob Jenks, director of Oregon's Citizens' Utility Board. Wisconsin even has a poison pill to block a merger.

In 1999 Maryland allowed BGE to transfer its generation plants to Constellation in return for a limited 6.5 percent rate cut. That was the first big step of deregulation and set the stage for today's mess by forcing BGE to bid for electricity in the open, expensive market.

Let's go after rate relief again this time, the second big step of deregulation. But don't lose sight of the big picture.

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