Nuclear Buzz Political Tug-of-War Threatens Constellation-EDF Joint Venture

This article originally appeared in Fuel Cycle Week #338, 8/5/09

By Nancy E. Roth, Managing Editor, Fuel Cycle Week

Rising tensions between the Constellation Energy Group and Maryland regulatory and political authorities have generated sensational headlines in recent months. But last week the rancor quotient spiked when the Maryland Public Service Commission announced that it was extending its review of the proposed $4.5 billion nuclear joint venture with Èlectricité de France to Oct. 16, well beyond the deal’s Sept. 17 closing date. Constellation and EDF had asked that the ruling be delivered before the negotiated date, which Constellation described as “firm.”

The shouting match began on June 11, when the PSC affirmed its authority to determine whether Constellation’s plan to sell the French state-owned utility a 49.99% stake in its nuclear assets was “consistent with the public interest, convenience and necessity, including benefits and no harm to consumers.” The PSC has no jurisdiction over Baltimore-based Constellation, but it does regulate the energy group’s wholly owned subsidiary, Baltimore Gas and Electric. Since the PSC took up its review in February Constellation has disputed the commission’s claim of jurisdiction over the matter.

Constellation swiftly filed a lawsuit to overturn the regulator’s decision, but in early July a judge dismissed the case, suggesting that such steps in the PSC’s regulatory process were not subject to reversal in court. This has left the energy holding company with no recourse until the PSC delivers the final result of its review, which Constellation may then appeal.

Scoring a “Big Win” for Ratepayers

Perhaps what is most vexing from the perspective of the embattled energy group is that it had worked assiduously to avoid this very scenario last December while negotiating the terms of its joint venture with EDF (FCW #305, Dec. 17).

Specifically, the two companies crafted the deal to comport with a $2 billion comprehensive settlement package Constellation had signed with Maryland Governor Martin O’Malley (D), the Maryland Public Service Commission and the state legislature in 2008. The settlement was to resolve several points of contention in a dispute regarding the terms of the 1999 deregulation of the state’s electricity market.

The specific provisions of the settlement, as listed in documents on O’Malley’s website, are still being negotiated, including about a dozen “ring-fencing” measures to insulate BGE from potential financial pressure by its parent company.

For example, under the proposed provisions, BGE is to be protected if Constellation files for bankruptcy. Constellation may not allocate any costs of its UniStar joint venture with EDF to the utility. In addition BGE must give all Maryland residential customers a one-time 10% credit on their electric bills, and suspend all increases in delivery or distribution fees until 2011. Any rise thereafter is capped at 2.5%.

Not listed, however, is a provision amending state law to accord “safe harbor” to certain Constellation transactions. The law would specifically exempt business agreements involving less than 20% of Constellation stock and 20% of its board of directors from PSC review. The two companies clearly had the safe harbor criteria in mind when they drew up the terms of last December’s deal. It gave EDF a 9% stake in Constellation and allowed it to contribute a 9% share (one member) to Constellation’s board of directors.

In an April 24, 2008 press release O’Malley and other state officials trumpeted the settlement as a “big win” that “delivered on [the governor’s] promise to BGE ratepayers.”

“Safe Harbor” Denied

But in its June statement the PSC ruled that the safe harbor pro- vision “does not immunize the [Constellation-EDF] transaction from all public interest review.” Rather, Maryland law “directs us to determine whether EDF will have the power to exercise any substantial influence [over the policies and actions of Baltimore Gas and Electric Company].”

The primary grounds for the finding lie in “EDF’s post-closing ability to control the flow of dividends from Constellation Energy Nuclear Group to [Constellation Energy Group],” which, according to the PSC, “could affect substantially the decisions CEG and BGE make as to the financing and financial structure of the utility.”

O’Malley put it more succinctly in a June 18 videotaped speech in support of the PSC on his website. “We know that BGE is a cash cow for Constellation Energy. We know that BGE pays more than half of all dividends paid into Constellation Energy and has a huge impact on Constellation’s bottom line,” he said, adding that this was why the government “stepped in to look out for the public interest."

In response to the PSC’s announcement of the extended review deadline, Constellation pronounced itself “disappointed” in a July 30 statement, noting that since the review began in February, “Constellation Energy, BGE and EDF have produced in excess of 15,000 pages of documents, provided unprecedented access to senior corporate officers for hours of depositions and testimony, and submitted numerous briefs and expert testimony. ... We believe that the parties have all of the information reasonably necessary to review the EDF transaction.”

The PSC also acceded to five antinuclear groups’ joint request, backed by the Maryland Office of People’s Counsel, that it hold evening public hearings on the deal to take comments on the deal.