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City ends 31-year tie with Allegheny

November 21, 2002|by JULIE E. GREENE

julieg@herald-mail.com

HAGERSTOWN - Allegheny Energy's troubled finances, industry and market conditions, and deregulation were factors in the company not getting a new power supply contract with the City of Hagerstown.

The City Council unanimously approved a new three-year contract with low bidder Dominion Energy Marketing Inc., of Richmond, Va., on Tuesday. The deal will end a 31-year relationship the city had with Allegheny Energy Supply as its wholesale supplier.

Allegheny Energy Supply is the energy trading subsidiary of Allegheny Energy, a Fortune 500 company whose headquarters is southwest of Hagerstown along Downsville Pike.

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Hagerstown Light Department Manager Terry Weaver said Wednesday he recommended Dominion to the council based on its price, financial rating and "stronger credit support."

That credit support was the contract performance bond Dominion proposed and Allegheny did not.

This was the first time the city asked bidders to submit contract performance bonds since electricity was deregulated in Maryland in the late 1990s.

A performance bond is a letter of credit from a financial institution stating the company promises to pay a set amount if it cannot provide electricity to the city under the agreement's terms.

"With the industry in the state of flux it seems to be in right now, we want some kind of surety if there's a problem," Weaver said.

Having a good financial rating now doesn't mean a company couldn't have problems down the road and need to terminate the contract early, he said.

Under Dominion's performance bond, Dominion would put up a $6 million bond for the first year of the contract, $4 million for the second year and $2 million for the third year.

Another factor was the financial rating.

Company rating


Dominion's parent company, Dominion Resources, has a Baa1 rating with Moody's Investors Service, the rating agency reported Wednesday. Bonds and stocks with a Baa rating are neither highly protected nor poorly secured, according to Moody's rating system.

Moody's lowered Allegheny Energy's and Allegheny Energy Supply's ratings to B1 in November and has the companies' ratings on watch for another possible downgrade. Those ratings had been lowered to "junk" status on Oct. 1.

Weaver wouldn't say what the effect on his recommendation would have been if Allegheny had provided a performance bond or had better financial ratings.

That would have depended on several factors, including what kind of performance bond Allegheny would have provided, he said.

Allegheny Energy Supply spokeswoman Janice Lantz said not offering a performance bond or collateral was a "business decision."

"We didn't think it was appropriate because we had decided not to post collateral to various counterparties," Lantz said.

When Allegheny's credit rating dropped, other businesses wanted Allegheny to post collateral before trading energy with the utility, Lantz said.

"We had to decide, 'yes, we'll do business with this person so we'll post collateral,'" Lantz said.

When asked if Hagerstown wasn't a big enough customer to make it worth Allegheny's while to post collateral, Lantz said she couldn't "speculate."

Lantz said Allegheny's bid "was in the ballpark" of Dominion's bid to sell power for 4.43 cents per kilowatt hour.

Both Weaver and Lantz refused to say what Allegheny's bid was, and Lantz said that was proprietary and confidential information.

Mayor William Breichner said he had hoped Allegheny's bid would be within a few fractions of Dominion's so he could encourage the council to stick with the local company, Allegheny.

"When you talk about a cent in this area, you're talking about big bucks," Breichner said.

"It was disappointing. I was hoping (Allegheny) would come in with a solid proposal," Breichner said. "What threw us off was their unwillingness to provide a letter of credit to guarantee performance."

Lost deals


In addition to losing the Hagerstown contract, Allegheny recently lost contracts with three other Tri-State area municipalities.

City officials with Hagerstown, Williamsport, Thurmont, Md., and Front Royal, Va., voted separately Tuesday night to switch from Allegheny Energy Supply to Dominion Energy Marketing, officials said. The four communities have had a consortium for 15 years.

Allegheny's contracts with those communities expires June 30, 2003.

Last week, Borough of Chambersburg (Pa.) Council members approved a five-year contract with Detroit Edison. That vote ended a 60-year relationship with Allegheny Energy, whose contract with the borough expires at the end of the month.

Lantz said Allegheny's bid to sell power to Hagerstown was competitive in the newly deregulated market.

Under deregulation, Allegheny can't offer an unprofitable contract to Hagerstown and pass on the difference to other ratepayers, Lantz said.

"We have to be competitive. We have to make a profit on this," Lantz said.

Lantz said she didn't think deregulation was the reason Allegheny didn't get the contract.

"It's a good thing deregulation is working. This is the way the competitive market works. Allegheny can accept (that)," Lantz said.

"We put forth our best bid," Lantz said.

The power freed up from not getting the Hagerstown contract can be sold "at a market rate that won't hurt our future profitability" based on Allegheny's market forecast, Lantz said.

In the Pennsylvania, New Jersey, Maryland market, the average price as of Tuesday was 3.3 cents per kwh, Lantz said.

The average market rate fluctuates on a daily basis, Weaver said.

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