Competitive market still unfulfilled idea

January 12, 2003
The Baltimore Sun
Dan Thanh Dang

Weak finances, slowdown in deregulation delay plan Maryland utilities

Maryland's continued push to create a competitive electricity market faces a difficult road after a year marked by continued fallout from Enron Corp.'s collapse, a weak economy and federal investigations into trading scandals.

In fact, Maryland regulators say electric competition may not be realized - at least, not anytime soon - because of the slowdown in deregulation nationwide and shaky finances of many energy suppliers.

"The Enron situation has resulted in the drying up of credit for energy companies who need capital to go out and build new generation facilities," said Gregory V. Carmean, executive director of the state's Public Service Commission. "That means retail suppliers who we had hoped would come here to launch their services have less access to capital, which means the competition we hoped for may not be realized, at least in the short term."

Still, rules and regulations developed by the Public Service Commission this year will be critical in helping an active energy market take shape.

An important component, regulators said, would be the extension of some protections for the state's most vulnerable customers from price spikes and erratic supply after rate caps on power begin expiring in 2004.

"We're also in an economic downturn," Carmean said. "But eventually, when the economy picks up, the demand for electricity will pick up. We have to be prepared. The primary focus of this year will revolve around the whole process of making sure there is some service available for customers after the transition period in July 2004 when the price caps disappear."

If that sounds like re-regulation, it is - at least to a degree.

Many states have either rejected or slowed deregulation because of industry turmoil and concerns about California-like shortages and soaring prices. But Maryland said it is moving ahead cautiously, especially as energy companies hobbled by the downturn begin to regroup and change strategies.

Many energy companies have shut down their trading businesses, sold off assets to raise cash and are struggling against filing for Chapter 11 protection.

"I am certain that a lot of companies are sorry that deregulation came about," said Joan T. Goodman, an energy analyst at the Pershing division of Donaldson, Lufkin & Jenrette Securities Corp. "They got fooled with the rest of the public because they thought with deregulation, they'd automatically get really high prices [for electricity]. Well, prices are 80 percent less than what they were in 2000.

"The industry has also gotten itself into too much debt," Goodman said. "Now they have to work like mad to work it off."

After canceling plans to split into two businesses in late 2001, Constellation Energy Group Inc. in Baltimore spent most of last year shoring up its balance sheet by cutting costs, refinancing debt and selling off noncore assets.

Pursuing that strategy has put Constellation in a position to consider possible acquisitions this year and still promise 10 percent growth during the next few years.

Its counterpart in Hagerstown, Allegheny Energy Inc., hasn't fared as well.

Allegheny lost $334.4 million, or $2.67 per share, for the nine months that ended Sept. 30, and warned that a bankruptcy filing is "likely" if it isn't able to restructure $1.7 billion in debt.

Allegheny's stock price has been mired in the single-digit range for the past couple of months; it halted its $1.72 annual dividend; it's in a legal battle with California over multimillion-dollar supply contracts; and it is countersuing Merrill Lynch & Co. Inc. over a trading business Allegheny bought from the investment firm.

"It's been like Peyton Place over at Allegheny," said John Sodergreen, publisher of the Scudder Publishing Group in Annapolis, which puts out five energy newsletters. "They have made some bad financial moves like everybody else. But they're a market maker and they've got iron in the ground, so Allegheny will come out."

The PSC is monitoring both companies, as well as Pepco Holdings Inc. in Washington, since all three will be a crucial part of plans to foster electricity competition in Maryland.

While the unregulated businesses at each utility have suffered in the past year, the regulated delivery businesses that include Constellation's Baltimore Gas and Electric Co., Potomac Electric Power Co. and Allegheny Power are healthy, regulators said.

The health of those regulated distribution companies is central to a proposed settlement now before the PSC that would require BGE, Pepco and Allegheny Power to continue providing electricity service at regulated prices to commercial and industrial customers who do not choose an alternative energy supplier for up to four years after the rate caps begin expiring in 2004.

For residential customers in the Baltimore region, the extension would last until 2010, four years after rate caps expire,

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