- The Washington Times - Wednesday, April 5, 2006

Wall Street credit-rating agencies are warning that Washington-area power companies could sink into financial trouble if lawmakers bar them from recouping their soaring fuel costs through rate increases.

Most of the area’s utilities face downgrades of their credit ratings — which means more difficulty raising the funds needed to keep subsidizing ratepayers and pay for increased power in the future — as a result of proposals in the Maryland legislature to roll back rate increases ranging from 40 percent to 72 percent.

So far, the Democrat-controlled legislature has not tampered with the rate increases, scheduled for this summer, but it has passed bills that would replace Public Service Commission members who approved the rate increases and would halt a planned purchase of Constellation Energy Group, parent company of Baltimore Gas and Electric Co. (BGE), by FPL Group, a Florida power company.

The legislature is moving in a “dangerous” direction that is reminiscent of missteps taken by the California Legislature that pushed the state’s two largest utilities into insolvency in 2001 because they were barred from passing through to consumers skyrocketing fuel costs, said Ellen Lapson of Fitch Ratings Ltd.

In the California case, the state ultimately had to take over purchases of power on behalf of the insolvent utilities and sustained record budget deficits that plunged its own finances into disarray.

“In Maryland, it’s Democrats versus Republicans, and everybody hates each other. A lot of people are making political points. It’s not a good environment for the financial health of utilities,” Ms. Lapson said.

“For legislatures to make electricity tariffs is dangerous,” she said. “They’re not as wise as the regulatory commission and don’t have as much flexibility to take into consideration the full public interest, including the interest in maintaining the solvency of the utilities and attracting capital” so they can expand power delivery in the future.

Stopping the merger ultimately would hurt the utilities and its customers, Fitch noted, as the cost savings and financial benefits would enable the Baltimore utility to withstand the financial strain from the slower phasing-in of rate increases that the legislature is demanding.

Moody’s Investors Service also is warning that the legislature’s actions to reverse needed rate increases could put utilities on a path of financial decline. It is considering downgrading the ratings of the Potomac Electric Power Co. (Pepco), Delmarva Power and BGE.

In addition, last week Moody’s cut the ratings of Dominion Power Co., whose Dominion Virginia Power serves Northern Virginia customers, partly because it likely will face the same kinds of political pressures when its rate caps expire a year from now.

Moody’s noted that the Virginia power company faces growing financial pressures because of “higher fuel costs and other expenses that the company cannot presently pass through.” The next rate increase, scheduled for mid-2007, is likely to be particularly big and “contentious” as a result, Moody’s said.

“Significant delay” in the Baltimore utility’s plan to raise rates “could result in an increase in BGE’s debt level for at least several years and may also increase the risk that the full amount of increased costs might not ultimately be recovered,” Moody’s said.

Pepco and Delmarva, both owned by Pepco Holdings Inc., may have difficulty covering their costs because of “regulatory risk in Maryland and Delaware, with opposition to large fuel-related rate increases and the likelihood of rate phase-in or rate-stabilization plans,” it said.

If Pepco is barred from recouping its costs, like BGE, it would have to go deeper into debt to cover any shortfall caused by extended rate caps, Moody’s said, potentially putting it on a slippery slope of rising debts, coupled with higher fuel and interest costs and fixed revenues that can lead to insolvency.

Currently, all of the utilities have investment-grade ratings, which means they easily can satisfy their borrowing needs in financial markets at moderate rates of interest. Ratings cuts will force them to pay higher interest, and any plunge into “junk” status would drive their borrowing costs sharply higher.

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