Outrage fires up regulation sentiment

Constellation executives call millions in payouts necessary

March 20, 2009|By Hanah Cho | Hanah Cho,hanah.cho@baltsun.com

Maryland lawmakers are criticizing Constellation Energy Group's plans to award up to $32 million in performance and retention payouts to top executives during the next two years, saying yesterday that the payments ignore the financial struggles of utility ratepayers and shareholders amid the recession.

Gov. Martin O'Malley and others said indignation from citizens about the payments was fueling new calls for re-regulating the energy industry in Maryland.

Others said the money should be diverted to help customers of Constellation's Baltimore Gas and Electric Co., the state's largest energy provider.

BGE customers are angry about paying higher bills this winter as Constellation plans to seek rate increases for delivering electricity and natural gas next year.

For their part, Constellation executives scrambled to contain the fallout yesterday, saying the average awards of more than $100,000 for each senior manager are necessary for employee retention. And they said the payments would not contribute to higher costs for ratepayers.

"These bonuses are yet another example that deregulation has not worked for residential ratepayers," O'Malley said in a statement. He has proposed legislation that would allow the state to regulate future power plants.

"It is hard to accept the necessity of paying $32 million in retention bonuses during record unemployment," he said.

When Constellation agreed to sell half of its nuclear power business to France's largest utility for $4.5 billion, it negotiated a deal to ensure that senior managers would receive the long-term performance and retention awards they would have received under a previous deal with Warren Buffett.

After agreeing to sell itself to Buffett's MidAmerican Energy Holdings Co. to avert a near-bankruptcy last fall, Constellation dumped that deal in favor of Electricite de France's bid in December.

Constellation has laid off more than 800 workers, slashed its shareholder dividend by half and is seeking the rate increase for BGE's 1.2 million customers.

Constellation officials say the payments are needed to retain key senior managers in critical operational roles throughout the company, including at its power plants. They continued to insist yesterday that the payouts are not bonuses because they represent long-term performance, not the past year's results.

"We're absolutely sensitive to our customers and their concerns over higher-than-normal bills," Constellation spokesman Rob Gould said. "But this is a very different and unrelated issue and does not involve BGE customer dollars."

If the deal closes, EDF would pay the difference between what the senior executives would have earned based on company performance and what they would have gotten under a Buffett buyout.

The sale to Buffett would have triggered "change-in-control" payments for executives, including early payouts of long-term performance incentives at a high level. It's a common practice used to ensure that management works in the best interest of shareholders.

"Everybody found that in the same filing where Constellation was arguing there was no change of control for regulatory purposes, there was a change of control for bonuses," said Democratic state Sen. Jim Rosapepe, who co-sponsored legislation to end the 1999 state law that deregulated the energy industry. "Again, it undermines their credibility."

State energy regulators have asked Constellation executives to reconcile their argument that the EDF deal would not result in a change of control while the French utility has agreed to make payouts as if it would.

The Maryland Public Service Commission is investigating whether the deal would have substantial influence over BGE.

In response, Constellation general counsel Charles Berardesco said EDF will not have control over what amounts may be paid to executives, according to written testimony submitted to the PSC.

EDF has agreed to pay up to $19 million in performance awards covering 2007-2009 and up to $13 million for 2008-2010, according to the purchase agreement between Constellation and EDF and documents submitted to the PSC.

About 120 senior managers would be eligible for $7.8 million and $5.7 million for those respective periods, Gould said. While the actual incentive amount has yet to be determined, the payout averages about $113,000 per employee during the two performance periods.

No executive officer, including Chairman and Chief Executive Officer Mayo A. Shattuck III, has been guaranteed the incentives they would have received under the Buffett deal. It will be up to the board of directors' discretion, Gould said.

The payouts would not be made until next February and February 2011, Gould said, adding that an employee must be working for Constellation at the end of the performance period to be eligible for any payout.

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