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As Long as We Remember...

April 4, 2006

Shock and Amps

Kevin E. Dayhoff

The recent power surge of Maryland General Assembly legislative initiatives in response to the end of the Baltimore Gas and Electric Company’s electric rate price freeze ought to be referred to as the “Omnibus Rolling Blackout Acts of 2006.”

Conventional wisdom considered that the 1999 electric deregulation legislation seemed to be a good thing at the time; and it had bi-partisan support as well as the support of the industry.

Unfortunately, the wheels started to come off the cart at the very beginning, as the legislation imagined by the deregulators and the electric utility industry and the legislation they got were two different things.

The intent of the legislation was to facilitate market forces coming together to blunt future rate increases, if not lower utility bills.

Then, to “encourage” competition – in a scene that only the Marx Brothers could have written – electric rates for Maryland consumers in 1999 were frozen at the 1993 rate minus 6.5 percent.

Meanwhile, the real world has not cooperated. National and global electricity demands continued to rise, and supply failed to keep pace. Recent natural disasters – such as Hurricane Katrina – have not been helpful.

The intelligent question is immediately obvious, with electric rates increasing precipitously outside Maryland. What competitor is going to enter the Maryland market and compete against rates artificially set so far below the market?

By the way, you should know that the Maryland General Assembly, one of the highest paid part-time legislative bodies in the nation, was paying itself $30,591 per year in 1999. In 2006, members will receive $43,500.

If the very same regulation foisted upon the utility industry were applied to the membership of the General Assembly, their pay would have been frozen for the last six years at the 1993 rate, $28,000, less 6.5 percent, which equals $26,180. The increase between $26,180 and $43,500 is 60 percent.

To make matters worse, site locating – and getting a power plant permitted in Maryland (or the United States, for that matter) – is practically impossible.

Maryland already imports 28 percent of its electricity. The population, and demand for electricity, continues to increase. Without additional electric generating capacity, Maryland’s percentage of imported electricity can only continue to rise, as will the price.

So far, BGE and the Public Service Commission have been successfully blamed by the General Assembly leadership for the nationwide rise in the cost of electricity – a factor which is totally out of the control for either BGE or the PSC.

If we could burn the populist manure, or use the hot air coming from Annapolis between January and April to produce electricity, Maryland would have the cheapest utility rates in the world.

What can bring down the cost of electricity is increased competition and economies of scale provided by the merger of BGE and Florida Power and Light.

Can the General Assembly force power plants in other parts of the nation to sell us electricity below the cost of generating it? If BGE is forced to purchase electricity at a higher cost than it is allowed to charge for it, simple Economics 101 says that approach doesn’t have a bright future.

California tried that. The result was the financial ruin of its public utilities and the state’s increased need to purchase electricity on the spot market, the price of which reflected the risk of selling the electricity to a utility whose financial health and credit rating was in the toilet. We are all aware of the rolling blackouts that resulted in California.

In an article in the Baltimore Business Journal February 17, BGE President Kenneth W. DeFontes “sketched out a scenario in which BGE would be forced to sell power to residential consumers at less than the price it pays to power producers and then would be forced to borrow hundreds of millions of dollars to keep providing power. If energy prices continue to rise, he said, the company could end up in a financial crisis.”

"Our credit ratings would collapse to junk status, we wouldn't be able to borrow the money, and the company would essentially go bankrupt," Mr. DeFontes ominously predicted.

Gee, that’s a reminder to call to your attention that in the number of weeks since the Baltimore Business Journal article, Moody’s Investors Service and Fitch Ratings lowered the credit rating of BGE, Pepco and Delmarva Power and Light.

For more information on this aspect of this epic saga, read the article in the March 29 edition of The Gazette by Douglas Tallman and Thomas Dennison: “Uncertainty over rates could harm consumer, Pepco executive warns… Credit rating is at risk, which means it would cost more to provide power, and bills would go up even more…”

In addition to The Gazette and the Baltimore Business Journal, Paul Adams and Jay Hancock, writing in Baltimore’s Sun have also written a number of informative articles on the current challenges.

The articles written by the Sun’s political writers covering the General Assembly are to be avoided at all costs, unless you wish to be totally misled and misinformed, and want to further disseminate all the Democratic leadership’s partisan talking points.

Meanwhile, Maryland is continuing to be famous for being hostile to business. You may recall that the commercial BGE electric rates were deregulated last year and rose precipitously, with nary a whimper from the General Assembly.

Additionally, business and economic development leaders from across the state are working hard to keep as many jobs in Maryland as possible in light of the pending Constellation merger with Florida Power and Light.

One of the six Fortune 500 companies currently headquartered in Maryland is Constellation Energy. On the heels of the Wal-Mart legislative debacle, the current machinations of the General Assembly does little to encourage investment in Maryland, or to give confidence to Constellation – or the other five Fortune 500 corporations – to stay.

By the time the Merryland General Assembly Opera is reaches sine die next Monday, the best investor owned company in our great state will be the candle making and flashlight business; and the only employers left will be government.

Shocking, isn’t it?

Mr. Dayhoff writes from Westminster. Email him at:

Yellow Cab
The Morning News Express with Bob Miller
The Covert Letter

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