BGE will seek rate rise

Profit falls 23% at utility's parent

November 01, 2007|By Paul Adams | Paul Adams,Sun reporter

With Baltimore Gas and Electric Co.'s quarterly earnings down 30 percent, Constellation Energy Group Inc. said yesterday that it will ask state regulators to increase the amount the utility can charge for delivering power over its wires.

The company said it intends to ask the Public Service Commission for the increase sometime in the next year to bring BGE's rate of return in line with what is earned by comparable utilities nationwide.

Though the impact on customers would likely be small - probably in the low single digits - the rate talk comes as the PSC is already under pressure to lower utility bills after a 72 percent BGE rate increase over the past year.

FOR THE RECORD - A photo caption accompanying an article in Thursday's Business section incorrectly stated that BGE buys energy directly from the Brandon Shores power plant owned by Constellation Energy Group Inc. BGE buys electricity from a variety of sources, including Constellation, through a bidding process overseen by state regulators.
The Sun regrets the error.

Constellation officials discussed the plans with analysts after reporting third-quarter net income of $251.4 million, or $1.38 per share, compared with $324.4 million, or $1.79 per share, for the quarter in 2006. The 23 percent decline came amid higher expenses, which helped offset a 6.8 percent rise in revenue to $5.76 billion.

BGE, which earned 14 cents per share out of Constellation's $1.38, represents a fraction of Constellation's overall earnings. The utility's latest earnings were down 6 cents per share from a year ago.

A utility rate increase would only apply to electric distribution charges, which account for about 21 percent of a typical customer's bill.

Electricity charges - which account for more than two-thirds a customer's bill - would be unaffected.

The result would be a tiny overall increase in electric bills when compared with the 72 percent jolt customers got as a result of rising electricity costs.

The electricity portion of a customer's bill represents what BGE pays to purchase electricity and does not raise profits for the utility. Proceeds from the 72 percent rate increase go mostly to pay Constellation and other companies that supply the power BGE delivers to its 1.1 million customers.

Constellation has been indicating for months that it was likely to seek a distribution rate increase - BGE's first since 1993.

John R. Collins, Constellation's chief financial officer, said BGE's return on equity has fallen to 7.5 percent, compared with the 10 percent to 11 percent that is typical for utilities nationwide.

The erosion occurred in part because of givebacks the utility was ordered to provide customers as part of legislation passed in 2006 to deal with the 72 percent rate increase.

Lawmakers ordered BGE to stop collecting a fee to pay for the future decommissioning of its nuclear plants, amounting to about $18.6 million annually. It also took back a $20 million annual administrative charge for acting as the electric provider of last resort.

Edward C. Bodmer, a Chicago utility industry consultant and finance expert, agreed that a 7.5 percent return would be considered low for a regulated utility. However, Bodmer said, utilities that don't own power plants - including BGE - have fewer risks than traditional utilities.

Consequently, there is fierce debate within the industry as to whether lower risk should translate into a lower regulated rate of return. State utility commissions have been reluctant to subscribe to that theory out of concern that credit ratings agencies and Wall Street investors will claim it's unfair to the utilities they follow.

"There is a tremendous amount of pressure put on commissions to keep rates of return up," Bodmer said.

Mayo A. Shattuck III, Constellation's chairman and chief executive, said BGE needs to earn more to get investors and lenders to finance capital projects the utility plans to undertake. Among other things, the utility wants to invest hundreds of millions of dollars in advanced metering technology aimed at helping customers conserve power and lower their bills.

Maryland regulators recently determined that Pepco and Delmarva Power & Light could earn a 10 percent rate of return. Both companies completed rate cases before the PSC earlier this year. Consumer advocates argued the utilities deserved a lower return.

"BGE will be examined on its own merits and we'll make a recommendation based on what we see in their financial and cost structure," said Theresa V. Czarski, deputy people's counsel, which advocates for utility customers.

Industry analysts have been increasingly concerned about moves by Maryland regulators and lawmakers to curb utility rates. The PSC is considering a number of reforms that would roll back aspects of deregulation and alter the way utilities buy their power supply.

Constellation's stock fell $1 to $94.70 after earnings fell short of analyst forecasts.

Constellation announced yesterday that it would undertake a $1 billion share buyback. The company also lifted the bottom end of its full-year earnings forecast to $4.45 per share from $4.30. It left the top end of its forecast at $4.65 per share.

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