Merger Ruling May Cost BGE Customers More

By Megha Rajagopalan, Capital News Service

ANNAPOLIS - The recent decision by the Maryland Court of Appeals that has endangered a merger between BGE's parent company and a Florida-based utility may have also thrown into doubt a plan to return to consumers some $386 million in rate reductions starting next year.

Consumers may lose the $386 million - commonly called "give-backs" - because it is unclear whether the payment of the money is dependent on the merger.

BGE has said there is "substantial uncertainty" over the question, and some independent legal experts agree. However, a top General Assembly analyst says the give-backs are guaranteed regardless of whether there is a merger or not.

Controversy over utility rate increases dominated the 2006 session of the General Assembly and has now returned as a major issue in the gubernatorial campaign.

The give-backs would total about $5.02 a month for the average customer beginning in 2007. They were meant to compensate BGE customers for interest charges that were passed on to them by the company when it was forced to borrow $600 million to make up for revenue deferred when a proposed 72 percent utility rate hike was phased in instead.

But in a major ruling in September, the Court of Appeals overturned parts of a law passed by the General Assembly in the spring that fired members of the Public Service Commission. However, the court left intact a part of the law which bars the PSC from ruling on the Constellation merger. This has thrown the merger substantially into doubt, and with it the promised give-backs.

In a filing last August made before the court ruling, Constellation urged the PSC to rule quickly on the merger, and said it was unclear whether any give-backs are guaranteed if the merger is not approved by the end of this year.

The company said in its filing, "there is substantial uncertainty as to the legal efficacy" of the provision forcing BGE to give back the $386 million in rate reductions beginning in 2007.

A Constellation spokesman declined to elaborate or say whether the company would sue over the law. He said, however, the company committed to paying the give-backs assuming the merger would close. The company expects the merger to create significant cost savings.

Even though company officials were reluctant to go beyond the words in their filing, Theresa Czarski, deputy People's Counsel—the consumer advocate before the PSC—interpreted the BGE filing as calling the give-backs, and the law that mandates them, into question if the merger collapses.

"There's a difference of opinion legally," she said. "They're the ones who have made an issue out of it."

A spokeswoman for the PSC itself said she can understand why the company might hold that view.

"When the company had spoken to [General Assembly members] in meetings, they had always said, 'based on the merger,'" said Bethany Gill, the PSC spokeswoman. "That was always the understanding, but it's not specifically mentioned in the law that way."

But a top policy analyst for the Maryland General Assembly said there is no doubt that BGE must pay the $386 million to customers.

Warren G. Deschenaux, director of policy analysis, said a portion of the give-backs, which are mandated by a law passed this year, are independent of the merger.

"The law was obviously advantageous to the customers," he said. "Everyone would win under that scenario except maybe BGE."

Deschenaux said the give-backs are supposed to come from three separate sources of funds within BGE - two that have nothing to do with the merger and total $386 million, and one that comes from money the company expects to save through the merger. Together, all three sources add up to a larger pool of $600 million in anticipated give-backs over 10 years.

Deschenaux said $386 million in give-backs are guaranteed by law even if the merger isn't completed. If the merger is completed, BGE has promised to give back $600 million to customers.

Usually the PSC would decide whether a utility rate is fair. This year, the Democrat-controlled Maryland General Assembly passed a law that fired members of the PSC, contending they didn't do enough about the scheduled 72 percent utility rate hike, which was a result of the lifting of a five-year rate cap. All but one of the PSC's members were appointed by Gov. Robert L. Ehrlich, a Republican.

In firing the PSC, the legislature, in effect, seized the authority to regulate the rates themselves, said Ronald D. Rotunda, a law professor at George Mason University.

"When the legislature changes the rules of the game after the game started, it interferes with investor-backed expectations," he said. "The utilities are guaranteed a reasonable rate of return on their property. You can't take that away without just compensation."

If the give-backs cut deep enough into that rate of return, the company could have grounds to sue, he said.

The average customer will pay $5 a month in interest and principal for ten years, said Mark Case, vice president of regulatory services for BGE. Individual costs would vary with electricity use.

The issue flared in the gubernatorial campaign during a televised debate over the weekend. Baltimore Mayor Martin O'Malley, Ehrlich's Democratic challenger, accused Ehrlich of appointing a PSC that was too cozy with utilities. Ehrlich retorted that O'Malley backed a rate relief plan that gave consumers a bad deal.

"The Maryland general assembly foisted an anti-consumer plan on more than a million BGE customers," said Henry Fawell, a spokesman for Ehrlich. "If the governor had his way, BGE consumers wouldn't be paying interest."

Raquel Guillory, a spokeswoman for O'Malley, said if elected, he would fire members of the Public Service Commission and appoint new ones to rule on the merger. "This PSC is incapable, has shown time and time again that it does not serve the citizens of the city of Maryland," she said.

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