NUCLEAR:

Political headwinds hit a reactor project on the Chesapeake

The proposed Calvert Cliffs 3 reactor in southern Maryland has been considered a leader in the nuclear power industry's hopes for a U.S. renaissance.

It is a finalist for a multibillion-dollar Energy Department construction loan guarantee, and for months, the political and financial signals facing it have been green lights. Its developer, Baltimore-based Constellation Energy, would share the deep pockets of its French partner, √Člectricit√© de France International (EDF), the largest nuclear power provider in the world. EDF has offered Constellation $4.5 billion for a 49.99 percent share in the Maryland company's nuclear power projects, including the proposed new reactor.

The Maryland State Public Service Commission approved the project in July. Constellation, which runs two reactors at Calvert Cliffs on the Chesapeake Bay, enjoys strong local support and was confident of getting an operating license for the third from the Nuclear Regulatory Commission.

But the project's future has been thrown into doubt by the same Maryland PSC. The commission has held hearings this week on whether EDF's stake in the project creates an unacceptable financial risk for the customers of Constellation's Baltimore Gas and Electric Co., the state's largest regulated power distribution utility. The commission said it will decide whether to approve the EDF-Constellation venture by Oct. 16.

The PSC debate is not strictly about the pros and cons of nuclear power. But beneath the particulars are a growing array of question marks. There are fundamental political and policy differences about how the state should secure its electricity supply, and whether a major new nuclear plant should be part of the answer.

Maryland Gov. Martin O'Malley said this week that "under the right circumstances, a new nuclear unit at Calvert Cliffs could very well be a good thing -- but only if ratepayers are protected."

The risk is that by trying to impose its terms on the deal, the state and its PSC will kill it. But the governor and his supporters have emphasized energy strategies other than nuclear for the future, including energy conservation and demand management -- and a possible return of BGE's role as a generator of regulated electricity.

Concerns over a French connection

The specific issue is the structure of Constellation's partnership with EDF, which rode to Constellation's rescue last year after a financial crisis in the Maryland firm's trading operations pushed it close to bankruptcy.

"Constellation and the French are currently insisting on free access to BGE's cash (your bill payments) in order to assist in the financing of an extraordinarily expensive new nuclear unit, whose true cost they have repeatedly refused to disclose. And there is no guarantee that their access to BGE cash couldn't be used for other, unspecified investments," O'Malley said this week in a letter to the Baltimore Sun.

Constellation and EDF say those claims are unfounded, noting that EDF will get only one seat on Constellation's 13-member board of directors. Several witnesses said that in its first seven years, the reactor would produce statewide economic benefits exceeding $1 billion in cheaper electricity, higher tax revenues, jobs and other construction.

Opponents, led by Maryland's Office of the People's Counsel, dispute such gains and say that BGE's retail power consumers could be hit with part of any cost overruns on the reactor project. The companies are willing to consider "ring fence" safeguards that would protect consumers if the plant nuclear plant goes forward, but say the state's demands go too far.

EDF Vice President John Morris testified that the project will not proceed if the PSC blocks the EDF-Constellation transaction or sets unacceptable conditions. "EDF's investment criteria provide for it to invest in new nuclear generation only where such investment is welcome," and an adverse ruling by the PSC would hang out a "not-welcomed" sign, he said. "EDF would be forced to conclude that the regulatory environment in Maryland is too unpredictable to justify an investment of the magnitude required to develop Calvert Cliffs."

A central issue is the multi-tiered project financing structure behind the EDF-Constellation partnership, which is meant to limit the business risks in the new nuclear venture. As Morris testified to the PSC, "the sole support for the financing is based on the project itself, and not on the general credit of the project sponsors" -- Constellation and EDF. There will be funds set aside for cost overruns, but if construction costs balloon and the project gets into financial trouble, the parent companies' obligations can't be increased and they cannot be forced to put more funds into it, beyond what the original agreement provides, Morris said.

The companies say this limitation protects BGE. Opponents of the EDF-Constellation partnership fear that trouble for the project would land at BGE's door through a reduction in investment capital that BGE might need from its parent.

Anti-nukes also seek a renaissance

A PSC hearing provided a venue for opponents of nuclear power to attack the EDF-Constellation venture. More than 150 people filled a State House hearing room early this month to take sides on the project. Two anti-nuclear organizations, the Maryland Public Interest Research Group and Public Citizen, rallied opponents bearing buttons reading "No Deal for Constellation de France."

Representatives of the Maryland Chamber of Commerce, several trade union groups and Habitat for Humanity of the Chesapeake showed up to support the reactor venture, the Baltimore Sun reported.

Maryland People's Counsel Paula Carmody said the issue has been wrongly portrayed as a referendum on nuclear power. "The companies are trying to present it that way. Our agency doesn't have a position per se on nuclear power. We've got a very specific perspective because we represent the BGE customers."

The test is whether the deal is in the public interest and whether it will result in "benefits and no harm" as Maryland law requires, she said.

O'Malley and other leading state Democrats don't mince words over their mistrust of Constellation, which they fault for painful electric bill increases of the past several years that put elected officials on the defensive.

O'Malley said the state's decade-old deregulation plan, which left Constellation in charge of power plants and BGE as the regulated electricity distributor, had failed Maryland's residential consumers. "It's resulted in unpredictable bills, unstable supply and higher and higher bills for ratepayers." The state wasn't "looking for this fight" with Constellation, he maintained, but fight it has.

Background: a shortage of additional power

Maryland's vulnerability to higher electricity prices and potential shortages has raised the stakes in the quarrel. A PSC report in 2007 noted that the state depends upon imported power for more than 25 percent of its electricity supply. Little new power plant construction is planned, the PSC added, but the existing high-voltage transmission lines delivering power from neighboring states are congested when demand is highest. The line congestion, in turn, keeps cheaper power outside of the state, forcing it to rely on local plants whose high costs raise Maryland's power prices.

Although the recession has pulled back on power demand, the state still needs some combination of more generation, more electricity conservation, and more transmission, the state report indicates. (In July, the PSC rejected a proposal for the new interstate PATH high-voltage line that would bring power in from states to the west. The commission majority said the complex financing structure for the project did not satisfy the statutory definition of an "electric" company. Allegheny Power, one of the line's sponsors, will redo the structure in hopes of winning approval, a spokesman said.)

The new Calvert Cliffs reactor's 1,600 megawatts of capacity would cover 40 percent of the 4,000-megawatt deficit in in-state generation resources noted in the PSC's 2007 report. Opponents said the power would belong to the Constellation-EDF venture, which would have no obligation to supply BGE at a reasonable price.

O'Malley pushed a bill this year that would have authorized the PSC to order BGE to build generation plants if necessary to meet the state's needs. In return, BGE would receive cost-based rates approved by the PSC. "This is the first step toward a long-term fix," said Malcolm Woolf, director of the Maryland Energy Administration. The proposal did not pass. But the legislation pointed toward a larger role by BGE in directly meeting the state's electricity needs, sharpening state leaders' concerns about BGE's financial health if Calvert Cliffs 3 is built.