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The Constellation Experience

Ring-fencing after the subprime meltdown.

Fortnightly Magazine - August 2010

they might well have the ability to better safeguard utilities and ratepayers by requiring strong ring-fencing.



  1. Energy Information Administration, Public Utility Holding Company Act of 1935 : 1935-1992, ch. 2, at 6 (Jan. 2003) .

  2. In a pyramid structure, one holding company owns another holding company and so on, so that ownership of the underlying operating company may be several levels removed and each additional layer of ownership gives rise to further leveraging. Each of the holding companies was able to issue its own stock and debt, typically outside the control of utility regulators.

 3.   Id. ch. 3, at 2-5.

  4. Standard & Poor’s, Jan. 16, 2003, “RatingsDirect,” entitled, “An Enron Subsidiary is ‘Ring-Fenced,’” states that these ring-fencing measures “served to largely insulate PGE from Enron’s subsequent woes.”

 5.   Energy Policy Act of 1992 , § 711, 15 U.S.C. § 79z-5a (repealed).

 6. Energy Policy Act of 2005 , §§ 1261-1277 (codified in scattered sections of 15 and 42 U.S.C.).

  7. Michael Lewis, The Big Short 23-24, 30-31, 50-51 (W.W. Norton & Co. 2010).

  8. The $700 billion in Troubled Asset Relief Program (TARP) funds was only one piece, and indeed, the smaller piece of the financial bailout. Separate and independent from TARP, the Federal Reserve purchased subprime mortgage bonds directly from the banks. “By early 2009 the risks and losses associated with more than a trillion dollars’ worth of bad investments were transferred from big Wall Street firms to the U.S. taxpayer.” Lewis, supra note 8, at 261.

  9. Constellation Energy Group, Inc., SEC Schedule 14A, at 32 (Oct. 17, 2008) (Preliminary Proxy Statement).

10.   Id. at 42.

11. “Constellation won’t make a specific commitment [to implement robust ring-fencing] until we know what the outcome of [the EDF] transaction is.” Transcript of Hearing at 439 (Michael Wallace, Vice Chairman and Chief Operating Officer, Constellation Energy), In re Balt. Gas & Elec. Co ., Case No. 9173, Phase II (Md. Pub. Serv. Comm’n., Sept. 15, 2009) (“Case 9173 Transcript”).

12. While Constellation’s finances were on the mend in September 2009, there was concern that EDF’s acquisition of nearly one-half of Constellation’s nuclear subsidiary could lead to the pursuit by Constellation of a the construction of a financially-challenging third nuclear reactor at Calvert Cliffs.

13. In re Balt. Gas & Elec. Co. , Order No. 82986, Case No. 9173, Phase II (Md. Pub. Serv. Comm’n., Oct. 30, 2009). The full particulars of the MDPSC’s conditioning requirements are worth reading and appear at pages 46 through 53 of Order No. 82986.

14. The SPE is required to have an independent director as well as an SPE golden share held by an SPE administration company and the vote of both is essential to the SPE’s filing of a voluntary petition for bankruptcy.

15. If the measures set forth in the Order were not sufficient to obtain a non-consolidation opinion, Constellation, BGE and the SPE were directed to take any and all further steps necessary to secure such an opinion.

16. Enron was