Pressing questions for BGE, consumers

Costs uncertain after rate deferral ends


A legislative proposal to partially defer a BGE electric rate increase for 11 months will allow the utility to recover its costs over a decade, but leaves unanswered questions about how much the utility and its customers will be paying once the clock runs out next year.

Though negotiations continue, the plan should allow the company to avoid financial peril by requiring customers to repay the deferred amount - something BGE said was essential to avoid a legal challenge on constitutional grounds.

That should calm investors worried that state lawmakers might force the company to undercharge for electricity in a move reminiscent of the 2001 California energy crisis. Pacific Gas & Electric was pushed into bankruptcy after lawmakers in Sacramento imposed rate caps at a time of soaring energy prices.

But the proposal awaiting approval in Annapolis will likely require the utility to take on anywhere from nearly $700 million to $1 billion in debt - depending on how the plan is implemented - and forgo nearly $45 million in annual revenue that it currently is entitled to receive.

The legislation also proposes replacing embattled members of the state Public Service Commission - a move that credit rating services said yesterday raises alarm bells and could lead to higher borrowing costs for the utility for years. Those costs are historically passed on to customers and could result in higher rates than would occur if lawmakers did nothing.

Though optimistic the plan will leave BGE's finances intact, analysts say it could be a long time before Constellation Energy Group, BGE's corporate parent, is able to regain the confidence of Wall Street and the credit markets on which it depends to fund its businesses. The political furor over electric rates also has left in doubt Constellation's $10 billion merger with a Florida utility owner and tarnished the image of a company that in five years climbed from No. 424 to No. 125 on the Fortune 500 list of the nation's largest companies. Constellation's stock fell 32 cents, less than 1 percent, yesterday to close at $52.33.

"Management credibility has taken a beating with the [Maryland] fiasco," said Credit Suisse analyst Dan Eggers, in a recent research note. Constellation "will need to rebuild market confidence."

The proposed legislation contains pain for both BGE and consumers. The increase in the utility's rates would be limited to 15 percent come July 1, when rate caps imposed as part of the state's 1999 move to deregulation will expire. That would require the utility to borrow hundreds of millions of dollars to bridge the gap between the 15 percent increase and the 72 percent rate increase the company says it needs to pay for more expensive power it must buy starting this summer. Analysts and company officials say that debt would leave BGE highly leveraged, making it a riskier investment and potentially restricting its access to capital.

"The most important thing [for legislators to understand] is there's a financial impact for the company when you request us to defer hundreds of millions of dollars," said Kenneth W. DeFontes Jr., president of BGE. "We're already on a credit watch."

However, the debt incurred in the plan would almost certainly be securitized, which means it is guaranteed to be paid back with a fee collected from customers that includes interest charges of about $109 million over 10 years, according to a draft proposal. Such debt comes with a lower interest rate and will have less impact on the company's credit rating than if the utility borrowed money with no legislated guarantee of payback.

By allowing BGE to recover all of its costs, lawmakers avoid an almost certain lawsuit from the utility. By law, utilities must be allowed to recover "prudently incurred" costs.

Legal experts say the utility would have argued that the 72 percent rate increase was the product of a state-mandated energy auction that was part of the move toward a deregulated market.

Under deregulation legislation, BGE and other Maryland utilities were required last winter to secure power supply contracts from the wholesale energy market. The auction was overseen by regulators, consumer advocates and outside consultants - all of whom agreed the process was fair.

The results could have been disastrous to BGE and Constellation had lawmakers opted to extend the current rate caps without allowing for any recovery of costs. Citigroup analyst Greg Gordon estimated the utility would burn through $60 million to $70 million a month under such a scenario. Under those circumstances, power generating companies might have refused to sell BGE power for fear of not getting paid, forcing a California-style meltdown in the state's energy market.

"A key component of the debacle in California was putting the utilities in a position of having to buy high and sell low," said William L. Massey, a former commissioner with the Federal Energy Regulatory Commission who testified yesterday on BGE's behalf.

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