Dealmaking Power Companies Change the Utility Landscape

By Washington Investing Jerry Knight
Monday, December 26, 2005

Consumers and investors may think it doesn't matter much that Constellation Energy Group Inc., Maryland's biggest utility company, plans to merge with Florida's FPL Group Inc. Think again.

Last week's $11 billion deal to create the nation's largest seller of electricity may bode well for investors. At the very least, executives have promised to pay shareholders bigger dividends after the two companies merge next year. And because it's an all-stock deal, the merger will be tax-free for investors.

But the merger may not be such a good deal for customers of Baltimore Gas & Electric Co., the local utility company from which Constellation of Baltimore was created. The state-regulated company that provides their power will become an even smaller part of an even bigger conglomerate that makes most of its profit through unregulated energy investments.

Even before the merger goes through, Maryland's top utility regulator has begun raising questions about whether BG&E's finances have been structured to benefit its corporate parent at the expense of Maryland natural gas users.

Last week the Maryland Public Service Commission slashed $17.5 million from BG&E's $54 million request to raise natural gas rates. Gas bills will go up by about $3 a month for the average residential customer instead of the $4 that BG&E wanted.

But PSC Chairman Kenneth D. Schisler wanted the rate increase to be pruned even more to assure that Maryland consumers are not subsidizing the vast array of unregulated business run by Constellation, BG&E's parent company.

Schisler contends that BG&E is borrowing money at costly long-term rates and lending extra cash to Constellation at bargain short-term rates.

Calling this a "subsidy from BGE ratepayers to Constellation and its unregulated affiliates," he said the company's financial practices "create costs for the ratepayers, which would not occur if BGE were a stand-alone gas company."

Schisler is no anti-business bomb thrower. Like three of the four other commissioners, Schisler was appointed by Maryland's Republican governor, Robert L. Ehrlich Jr.

"We are still reviewing the decision," Constellation spokesman Robert Gould said Friday, noting that this was BG&E's first rate increase request after almost six years of steadily rising costs. "We certainly respect the process needed to give it a thorough review," he said. Providing safe and reliable service to customers remains Constellation's priority, he added.

BG&E'S central Maryland territory stretches from Harford County north of Baltimore to Howard and Anne Arundel counties, plus a sliver of Montgomery County and a big chunk of Prince George's County.

The dissent by Schisler and fellow commissioner Allen M. Freifeld, another Ehrlich appointee, raised issues never before faced by Maryland regulators.

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