News Column

Constellation $245 Million Settlement for Trading Is Largest Ever

March 13, 2012

Hanah Cho

The $245 million settlement that Baltimore's Constellation Energy Group agreed to pay is the largest of its kind to resolve allegations of market manipulation with the Federal Energy Regulatory Commission.

Details of the settlement emerged Monday, the same day Chicago-based Exelon Corp. closed on its $7.9 billion takeover of Constellation. The sale creating the largest non-utility energy provider in the United States ushers Baltimore's last Fortune 500 company out of town. The New York Stock Exchange will de-list Constellation shares Tuesday.

Federal energy regulators approved both the sale and the settlement late Friday.

The settlement between Constellation and FERC resolves allegations that the company intended to manipulate New York wholesale energy markets by making trades to influence certain energy prices from September 2007 to December 2008. Those transactions, in turn, benefited other holdings in the company's energy-trade portfolio, FERC alleged.

While Constellation disagreed with FERC's findings and admitted no wrongdoing, the company said it was in its best interest to settle and move ahead with the merger.

Standard & Poor's described the settlement Monday as a "record-setting fine."

Under the settlement's terms, Constellation agreed to pay a $135 million civil penalty and "disgorge" -- or give back -- "unjust profits" of $110 million.

FERC said Constellation's $135 million fine is the largest since the Energy Policy Act of 2005 strengthened the federal regulator's authority to assess penalties of up to $1 million per day for violating laws governing the electric and gas industries. The previous record was a $30 million penalty imposed on a natural gas trader for market manipulation in April, according to FERC.

Constellation's $110 million disgorgement also is the largest since Energy Transfer Partners agreed to pay $20 million to settle allegations of gas market price manipulation in 2009.

Maryland could benefit from a slice of the $110 million, which will be disbursed in two ways.

Each of the six U.S. regional grid operators, including PJM, which covers Maryland, will receive $1 million to enhance its ability to detect market manipulation.

The remaining $104 million will be directed to a fund set up for the "benefit of electric energy consumers" in affected states. It will be split among three grid operators, with the New York market receiving $78 million, the New England market $20 million and PJM $6 million.

State agencies, such as public service commissions or state consumer advocates, can request money from the fund, which will be overseen by a FERC administrative judge, according to the settlement.

The Maryland Office of People's Counsel, which represents residential customers on utility matters, expects the state to receive some of that money for Maryland ratepayers.

People's Counsel Paula M. Carmody said that her office would be part of any proceeding dividing the money for the PJM market under what she described as a significant settlement.

"It could send real signals that they're serious about market manipulations," said Carmody, whose office raised concerns about market power in Constellation's merger. "Customers are at the mercy of what goes on in those markets with deregulation. It's important that FERC takes a tough stance to protect customers at the state level."

A spokeswoman for the Maryland Public Service Commission said Monday that it is studying FERC's settlement.

FERC launched the investigation, which wasn't made public until Friday, in January 2008 after receiving two anonymous hotline calls. The federal agency focused on trades from September 2007 to December 2008 by four employees of Constellation's East Power Trading Group.

The regulator's enforcement office determined that the alleged market manipulation "resulted in widespread economic losses to market participants who bought and sold energy" in the New York and New England wholesale markets, according to the FERC order approving the settlement.

Under the settlement, each of the four employees may not hold any position involving physical and financial energy trading at Constellation, a successor company or affiliate. The men are Michael Pavo and Jason Hughes, who were traders; their supervisor, Joseph Kirkpatrick; and Maxim Duckworth, the trading group's managing director of portfolio management and trading.

Pavo, Hughes and Duckworth remain with the company, while Kirkpatrick left on his own, Constellation said.

In an email Friday to employees, which was obtained by The Baltimore Sun, Constellation Chairman and Chief Executive Officer Mayo A. Shattuck III said the company believes it did not violate either FERC or New York energy market rules.

The company faced a dilemma in this case because no real-time record existed to prove the intent behind the company's financial transactions was "entirely lawful," Shattuck said.

"Absent this record, hedging activity was subject to misinterpretation by regulators and, in our view, that's exactly what happened," he said. "To mitigate future risk, we've agreed under the settlement to strengthen record keeping, improve compliance training and submit compliance monitoring reports to FERC."

Shattuck said settling the four-year dispute with FERC allows Constellation to move forward with the new company.

On Monday, Exelon's new senior executives met with employees in Baltimore and Chicago, where the new company will be headquartered. They included Exelon CEO Christopher M. Crane; senior executive vice president William A. Von Hoene Jr., and Kenneth W. Cornew, president and chief executive of Exelon's retail business, which will retain the Constellation brand.

Shattuck becomes Exelon's executive chairman and will split his time between the two cities.

The nearly yearlong effort to consummate the merger paid off for Shattuck, who has led Constellation since 2001 and had tried unsuccessfully to sell the company twice in recent years.

In September 2008, a credit crunch amid the financial crisis pushed Constellation to the brink of bankruptcy. The company's commodities trading operation, which required a lot of cash collateral, was the source of its credit woes.

The FERC market manipulation allegations are different from the liquidity issues that the company faced in 2008.

Exelon will retain a large footprint in Baltimore, where it has pledged to build a new headquarters in Harbor Point.

While involuntary layoffs will be avoided at Baltimore Gas and Electric Co. for at least two years under the deal, some 630 positions are expected to be eliminated across both companies. Job reductions would be felt most in Baltimore.

Exelon now operates two other regulated utilities in addition to BGE, one in Chicago and one in Philadelphia. As part of the merger agreement, residential customers of BGE can expect to see a one-time, $100 credit within 90 days, or around mid-June.

The two companies are combining operations immediately; integration efforts have been under way since last year.

"Today, we come together as one company. We have the best talent in the energy business, and we share a commitment to excellence," Crane said. "We are a diverse team reflecting the strengths of both Exelon and Constellation, and together we will continue to deliver world-class performance."



Source: (c) 2012 The Baltimore Sun


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