deregulation in Maryland and the drafting and enactment of the Electric and Gas Utility Tax Reform Act of 1999. Ed has testified in House Ways & Means, Senate Budget & Taxation and House Appropriations Committees on tax matters over the past ten years. He has also been involved in electric restructuring at the federal level including the Nuclear Decommissioning Restructuring Act introduced by Representative Cardin in 1999.
Ed is an active member and former chairman of the Edison Electric Institute Taxation Committee. He has represented the electric industry on numerous tax issues in testimony and meetings with the US Treasury Department and the IRS National Office including the Section 199 production deduction tax regulations and the currently proposed “tangibles” tax regulations published on August 21, 2006. Ed received his Bachelors degree in Accounting from the University of Maryland, his MBA from Loyola College and is a Certified Public Accountant. Prior to joining BGE in 1983, Ed was a Tax Principal with Ernst & Young.

KJ- You have a considerable amount of experience testifying in the House Ways and Means, Senate Budget and Taxation and the Senate Budget and Taxation Committees on tax matters. Please tell us about your experience.

ES- I have been very fortunate in that Constellation Energy has been involved with the Edison Electric Institute (EEI) and Constellation Energy also has a strong internal legislative affairs group. Both EEI and our legislative affairs office provided me the avenue to get involved in the legislative process. Deregulation of the generation side of our utility, Baltimore Gas and Electric (BGE) is what got me involved in Maryland. In fact, I recall the day that our company Chairman came to me and said, “I think there is going to be deregulation in Maryland. What fundamental changes will need to be made in our tax structure due to deregulation?” I said, “I will have to get back to you on that question!” In the process, it dawned on me that we needed to change everything!” This resulted in us making changes in gross receipt taxes, changes in the corporate income tax structure for utilities and significant changes in the property tax structure which effectively cut the property taxes in half for our generation assets. Generating these changes enacted into the law was very challenging but also very exciting.
The legislative experience provides you the opportunity to be working on tax issues on a very proactive basis. You actually have the opportunity to change the current tax structure if it needs change. It is very rewarding to be involved in this process. However, if I would give anyone advice it would be to know your facts. You should gather as much information as possible on a particular issue and then sit down and meet with Staffers and Legislators so when they ask you questions you have the answers. The key is to understand not only how it impacts you but how it impacts others as well. You will need to think about how it will impact others because many people will be coming to the table to discuss the issues.


KJ- What was the purpose of deregulation at the time?

ES- The purpose of deregulating energy generation was because large industrial companies were talking to power suppliers. At the time, the main power supply company they were talking to was Enron. Enron was saying,“You need to get your state to open up the power lines so we can supply power because we can supply it cheaper. The thought at the time was that deregulation was inevitable. In fact, the first state to deregulate was California. The question then became, “If the states are going to deregulate and allow customers to choose their own suppliers, what do we need to change regarding the various taxes that are imposed on public utilities or other companies because of deregulation? ”


KJ- What made Constellation Energy a success?

ES- Quite frankly, the key to the success of Constellation Energy goes back to the early formation of our Commodities Group. We originally had a business arrangement with a firm that provided us with risk management services. Many of these people who provided us these services eventually became employees and then our other employees learned risk management technique from these individuals. As a result, everyone learned from each other from this experience. Our success is largely attributed to the fact that we have acquired a very fundamental understanding of how to mitigate risk through sound risk management practices, such as hedging.


KJ-What major changes have occurred in tax over the years?

ES-Everyone had had to deal with Sarbanes Oxley. In the end, Sarbanes Oxley turned out to be very good because it brought critical tax issues to everyone’s attention including senior management and the audit committee. People could now see that tax is really important to the company and that the tax department needs the necessary resources to do their job!
There is now a acknowledgement and terrific support from my boss that we need to have the right people in charge. Although, Sarbanes Oxley was extremely painful in the short term it will prove to be very beneficial in the long term. There has been the realization that we need more and highly qualified people and we need better systems and IT support. Another point I would mention is that we are automating and improving all of our tax functions including compliance and financial statement reporting. We are continuing to make advances in all of these areas.


KJ- What kind of automated system did you choose?

ES- We chose Corptax because it is an integrated software package. It is integrated with the accounting systems and just like financial statement purposes we are computing income tax provisions each month and quarterly. Basically, we are able to do all of our calculations of the income tax provision directly from the general ledger and then it goes to the tax return software as well. Corptax has an international package that we are in the process of installing and they are getting ready to unveil their FIN 48 package which will do all of those calculations as well. We believe this is the most expanded tax package available to date.


KJ- How many people do you believe it will take to implement the Corptax software?

ES- We have already implemented certain modules. We have used Corptax personnel and have three people within our Tax Group that do nothing but system support for the Corptax software. This is a major, major change for us! We now have one of the most sophisticated automated tax reporting systems for tax return reporting and financial statement reporting.


KJ- What do you see in the future for Constellation Energy?

ES-It is no surprise that we continue to look at expansion opportunities. We are primarily in electricity and natural gas. However, we have a very active coal trading program in London and Australia. Whether it is electricity, gas or coal you need to understand your potential risk and exposure. Our management team understands the business and the exposure and as a result we have been able to succeed where others have not been successful.


KJ- Please explain to me what a “power position” is?

ES- A power position can take any number of forms. You may have an obligation to purchase power (i.e. electricity, gas, coal, wind) at a specified price or you have an obligation to sell power at a specified price. Whether you have an obligation to purchase or sell, you may be subject to various risks associated with those positions such as fuel or power price risk, supply risk as well as transportation risk (including “congestion” on the transmission power grid). Managing that risk but offsetting power positions by other financial instruments pending becomes a critical part of the process. Again, I believe Constellation Energy’s success has been its ability to manage this risk.


KJ- What most people may not understand or be aware of is that you are selling this obligation to other corporations. Your company is basically a broker who goes in and sells another company a contract for power for a specified period of time. How do you do this?

ES-We provide power on a retail and wholesale basis. We talk to the owners of the power plants and discuss the cost of the power. Again, we are working on both sides where the supply is the power itself and then you call the "load” the obligation to provide the power. The key to the success of our business is how well we manage the risk. The strength of our company’s management team is our ability to take on positions and successfully manage the risk of these positions - that’s how we make our money!


KJ- Are there any new forms of energy for the future?

ES-There is much talk of bio-diesel plants but I am not the person to say what the next great power source is going to be.


KJ- We see many wind mills in California. What is your opinion of this type of energy?

ES-We call them “wind farms” and Constellation Energy is actually looking at this type of energy right now. Wind power is certainly “green power” which is great but there are many places in the country where there is simply not enough wind to make it economical. Environmental groups have also voiced objections to wind farms in some locations because of concerns over certain bird or bat species.


KJ- Ed, thank you for the time you gave us to answer our questions. Your perspective is valuable to the Tax Intelligence Report readers around the world. We genuinely appreciate the time you gave to share your experience.

Kathleen Jennings (KJ)
Editor, The Tax Intelligence Report
Kathleen@etsearch.com

If you would like an introduction to Constellation Energy or if you would like to send a private email to Ed, please contact Kathleen Jennings at Kathleen@etsearch.com.