Hello, prasum!
I'm not sure I understand the problem . . .
The circle has the equation: . ^2 + (y-b)^2 \:=\:a^2+b^2-2 )
It has center
and radius 
Let
be any point (exterior to the circle).
Tangents are drawn from
to
and
on the circle.
. . The tangents are orthogonal: . 
Code:
|
| * * *
| * * A
| * ♥
| * o *o
| o o
| * C o * o P
| * (a,b)♥ * ♥(h,k)
| * o * o
| o o
| * o *o
| * ♥
| * * B
| * * *
- - + - - - - - - - - - - - - - - - - - - - - -
|
Since 
. . then quadrilateral
is a square.
Its diagonal is: . })
Therefore, the locus of the centers of the circles
. . is a circle with center
and radius })