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March 17, 2006

The Myth of Electricity Deregulation

Richard B. Weldon Jr.

In 1999, the Maryland General Assembly passed the inappropriately titled Electric Utility Industry Restructuring Act (SB 300). A significant part of this bill was the rate reduction. It specified that Maryland electric power consumers would benefit from a reduction in electric rates, followed by four years of a freeze in the electric rate.

This whole effort was prompted by the lobbying effort of Baltimore Gas & Electric, the company that stood to benefit the most from the deregulation components of the Electric Choice and Competition Act.

BGE spent over a million dollars on lobbyists for that session of the General Assembly, and even took out a four-page (that’s 1-2-3-4, versus a full page ad) advertisement in The (Baltimore) Sun touting the benefits of deregulation and increased competition for consumer electricity accounts.

BGE argued that without a deregulated business environment, they would be forced to move their business, citing Delaware as a possible location. They pressured delegates and senators who represented their service areas, and used campaign contributions.

In Frederick County, Eastalco lobbied the delegation hard to support the bill, even though there was no direct and immediate benefit. Every member of the Frederick County House delegation voted for the bill, in large measure due to the lobbying from Eastalco.

Eastalco was arguing at the time that the state needed to break up the huge power monopolies if we were to ever see reductions in the price of electric power. In a cruel ironic twist, that same manufacturer is now shuttered, the victim of the very solution the company sought in 1999.

Back to 1999, the voting tally for SB 300 shows an odd bipartisan mix, with conservative to moderate Democrats aligned with every Republican voting for the bill. The true liberals, at least as I would define them, seemed to vote against the bill.

The bill allowed for BGE customers to benefit from a 6.5% rate reduction. To give you a sense of how much that reduction saved customers, the Public Service Commission technical staff estimated that the reduction resulted in a total savings in 2005 for BGE customers of $474 million. On average, the per-customer savings equaled $30 per month.

The BGE territory rate freeze will be lifted as of July 1, 2006. Credible estimates indicate that once the rate cap is lifted, BGE standard offer service plans could increase anywhere from 40% to 81%.

I’ve written several times about the importance of the committee process. Delegates argue that it is impossible to read and understand every bill, so they depend on colleagues who serve on other committees to keep up with the details.

This is important when it comes to very complex issues like health care, banking, the criminal code, and utility regulation. As an example, Senate Bill 300 was 95 pages long! The normal bill is between 3 and 5 pages long.

I’ve read quotes from senior members and folks who used to serve in The General Assembly that they didn’t even read the bill. They “hoped” that the Economic Matters Committee had dealt with all of the issues associated with the bill, and that it was a “safe” vote.

Speaker Michael Busch (D., Anne Arundel) was then the chairman of the Economic Matters Committee. The bill was co-sponsored by the two most powerful members of the Maryland Senate, President Mike Miller (D., PG) and Sen. Thomas Bromwell (D., Baltimore Co.). Senator Bromwell chaired the Finance Committee, the committee that deals with utility regulation in the Senate.

So what of this deregulation? Residents of the lower Eastern Shore have already started to feel the impact of electric deregulation. Rate increases of 72% are not unusual for those folks who found themselves on the crest of the rate increase wave.

Rate reductions and freezes turned out to be a myth, and are now a cruel joke. The only real beneficiaries were the politicians who took credit for creating an artificial electric pricing environment and the utility industry, who had to suffer through a few years of tough financial times in order to benefit from the huge windfall that results from lifting the rate caps.

The promise of deregulation rested on the theory that lifting the constraints on mergers, consolidations, and other corporate profit-building strategies would expand the pool of electricity generators who would compete for business across the state.

We all know that hasn’t happened, just look at Eastalco. If they, with their huge daily demand, couldn’t entice competitors with discounted pricing, how are you (or any residential customer) going to?

The experts, such as they are, blame the rate caps for keeping residential electric prices well below market rates. They argue that these same artificial controls smothered competition.

My study of electric power generation suggests there were also a number of other factors. Rising energy costs, restrictions on residential consumers banding together in “aggregation,” and the high costs of sending power over crowded and over-burdened transmission lines have also conspired to drive up the cost of electricity.

One sad by-product of the terrible impact of the rate increases might well be the long-promised but never delivered competition. Power generators in other states are looking at Maryland right now. Commerce Energy of California is already licensed to sell power in Maryland, but they choose not to sell power now. They may be more interested when they see the new rate structures.

The Maryland Public Service Commission was warned by Gov. Robert L. Ehrlich to get in front of these projected increases. The PSC just announced a Rate Stabilization Plan geared to help BGE customers facing these huge rate hikes.

The plan would begin in July 2006 and run through May 2008. It allows most BGE residential customers the option of adjusting to the increased rate over an extended period of time.

Initial increases would be limited to 21%, and customers would receive credits to the distribution portion of their bill from July 2006 through February 2007. From February 2007 until May 2008, customers would see a charge to the distribution portion of their bill to recover the deferred amount. The customers will also have to pay a 5% finance charge to BGE on the postponed portion of their bills.

The next several years will be a sad reminder of the fact that utility companies are motivated by profit; that politicians rushed to judgment on deregulation; and in the end, there is no free lunch!

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