- The Washington Times - Thursday, April 6, 2006

Moody’s Investors Service yesterday cut the ratings of Baltimore Gas & Electric Co. (BGE) and warned that it will further downgrade the utility and its parent Constellation Energy Group if Maryland legislators follow through on threats to prevent them from recouping soaring fuel costs.

The utility now faces higher borrowing costs at a time when the insistence of the legislature will force it to go more deeply into debt to stretch out and phase in rate increases of up to 72 percent. Ultimately, ratepayers will have to foot the bill for the higher borrowing costs on top of the fuel-induced rate increases.

Maryland Governor Robert L. Ehrlich Jr., a Republican, is expected to veto bills passed by the legislature to block the rate increases and a planned merger between Constellation and a Florida power company. But Democratic leaders say they will enact the bills by overriding the vetoes through votes scheduled for Monday.

“It’s troublesome that Wall Street is looking at this. It hurts the company,” Greg Massoni, the governor’s press secretary, said after the Moody’s downgrade. “But because of what the General Assembly is doing, it is predictable.”

Moody’s is the first Wall Street credit agency to cut the Baltimore company’s ratings, but Fitch Ratings Ltd. and Standard & Poor’s Corp. also are expected to downgrade the utility if the rate increases are stopped or significantly delayed. Moody’s also has put Pepco Holdings and Delmarva Power on review for a downgrade because their planned rate increases also could be scaled back by the legislature.

“BGE faces heightened regulatory risk that could lead to significantly weaker financial performance,” Moody’s said in cutting the utility’s rating by one notch to A2, which is four levels above “junk” status. It said the ratings “could fall further if recovery of higher costs is very substantially delayed or if there is doubt about eventual full recovery.”

The outlook for Constellation remains positive, but the parent company could be weakened financially and face downgrades, as well, if BGE’s ratings fall further and it is forced to make large financial concessions to the legislature to obtain rate increases and approval of the merger with Florida Power & Light, Moody’s said.

Constellation already has offered to devote $375 million in profits and cost savings from the planned merger to subsidize a slower phase-in of rate increases, but the legislature rejected that as too little.

Utilities throughout the United States are facing record-high costs for natural gas and other fuels, as well as for purchases of power on the open market.

Large rate increases — like the ones between 40 percent and 72 percent pending in Maryland — could occur in the District and Virginia, as well, when existing rate caps expire next year.

The “rate shock” and political backlash that occur as utilities try to pass through their fuel-cost increases is worse in areas like Baltimore, where customers have enjoyed low, subsidized rates for a long time, said Ellen Lapson of Fitch Ratings. She said opposition to Pepco rate increases has not been as strong, perhaps because its customers experienced a 16 percent rate increase last year.

“Those who have had the benefit of low rates for a long time are, in fact, more resistant” when rates finally go up, she said. “When the price is unnaturally suppressed for a period of time, people interpret that as an entitlement.”

Moody’s and the other credit agencies came under criticism for not moving fast enough to warn investors and the public about the failing finances of California utilities in 2001 that were caught in a squeeze between skyrocketing fuel costs and rate caps like the ones facing Maryland utilities today.

Moody’s did not warn investors of potentially severe financial trouble until three months before California’s Pacific Gas and Electric Co. filed for bankruptcy in April 2001. Up until January 2001, when Moody’s suddenly downgraded the California utility to the lowest levels of junk status, it had solid credit ratings like those that BGE enjoys today.

The belated action in California and elsewhere prompted Congress and the Securities and Exchange Commission to investigate whether the ratings agencies were doing an adequate job in light of the special dispensations that they have received under U.S. securities laws. Moody’s appears to be moving more aggressively today, but spokeswoman Lisa Tibbitts and others at Moody’s declined to comment on the matter.

S.A. Miller contributed to this report.

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