BGE trade with parent under scrutiny

PSC pledges close look at how relationship affects supply, price

June 08, 2007|By Paul Adams | Paul Adams,Sun reporter

As a public utility, Baltimore Gas and Electric Co. is obligated to get the lowest price possible for customers. By contrast, its corporate owner, Constellation Energy Group, has a duty to stockholders to sell the power it produces for as much as it can get.

This disconnect is highlighted by the fact that Constellation, which assumed ownership of BGE's former power plants when Maryland adopted electricity deregulation, is the state's biggest seller of power and BGE is its biggest buyer. But what some consumer advocates call a conflict of interest is getting more scrutiny now, as Constellation's profits and stock price soar along with the rates that BGE's 1.1 million customers are paying.

In its May 23 order approving a 50 percent rate increase for BGE residential customers, the Public Service Commission said it plans to study whether the utility's relationship with Constellation works to the detriment of Maryland consumers. The probe would coincide with a series of studies that lawmakers ordered as part of a comprehensive review of utility regulation in Maryland.

As an example, the commission noted that BGE is opposed to owning power plants again - an idea the commission says could help reduce rates but also could cause the utility to buy less power from its corporate parent. The commission also questioned whether at least one Constellation officer has a conflict of interest when doing certain types of work for both BGE and Constellation.

"The commission will examine whether this affiliate relationship impacts the manner in which BGE satisfies its statutory obligations to customers in this state," the commission wrote.

BGE and some industry analysts dismiss the concern, saying the utility's relationship with Constellation gives it lower borrowing costs, less corporate overhead and other advantages it wouldn't have as a smaller, independent company.

Constellation replies

Constellation says it welcomes the scrutiny and will cooperate with the commission.

"Although we are confident that the interactions between Constellation and BGE are entirely appropriate, we are studying the commission's order to understand its concerns and consider whether there are alternatives that balance the need for corporate governance while preserving the benefits to consumers," said Rob Gould, a Constellation spokesman.

The line of inquiry reflects the commission's more critical approach to utility regulation since Gov. Martin O'Malley appointed three new members. Emboldened by a restless General Assembly and consumer outrage over electric rates, the five-member panel is challenging the underpinnings of the state's deregulation laws, adopted in 1999.

Part of the underlying premise of deregulation was that if utility companies don't own power plants, they can go into the open market and buy power from multiple suppliers that compete to be the lowest bidder.

"One difference between the prior commission and the commission that's seated now is we are very much engaged in a process to see what we can do to make things better, and not take at face value the proposition that markets are good," said Steven B. Larsen, PSC chairman.

The PSC order didn't accuse Constellation of breaking any rules. But it did call into question the dual role that John Collins, Constellation's chief risk officer, has played in the energy auctions that are critical in setting prices for power on the open market. Collins has since been promoted to chief financial officer.

When Constellation - an energy seller - sought to supply electricity to utilities and municipalities in other states, Collins and his team provided information that helped the company formulate its bid.

Switched sides

But when BGE - an energy buyer - sought bids for the power it distributes to customers, Collins switched sides and acted as an adviser to the utility. In that role, he saw the bids of companies that compete with Constellation for BGE's business.

The commission said it wants to explore whether that violates the spirit of state regulations requiring bids to remain largely confidential. Some industry analysts and utility officials say the information Collins might have picked up as an adviser to BGE could be gleaned from other public sources and would be of little competitive use to Constellation.

Some industry analysts have suggested Constellation could eliminate the appearance of conflict by spinning off BGE. Constellation contemplated that action in 2000, but the company later abandoned the strategy and regulators maintained the current structure during the transition to a deregulated power market.

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