Hopes high for deregulated electricity Manufacturers push for swift dismantling of state's system

Lower costs anticipated

Utilities' 'stranded costs' would be paid by all ratepayers

December 14, 1997|By Sean Somerville | Sean Somerville,SUN STAFF

Two years ago, Eastalco Aluminum Co.'s Frederick plant had the lowest power cost of the five major aluminum factories owned by its corporate parent, Alumax Inc.

But since then, company plants in South Carolina, Washington state and Canada have negotiated lower rates. Today, the Frederick plant has the highest rates.

"One-third of our costs is electricity," said Earl Robbins, public and government affairs manager for Eastalco. "Over the last three years, we've paid in the neighborhood of $65 million to $70 million a year. It is a raw material for us. And right now, we're at somewhat of a disadvantage."

Now, Eastalco and other Maryland manufacturers are pushing for the swiftest possible deregulation of the state's century-old monopolistic electric supply system. Already the beneficiaries of discounts because of massive purchasing power, manufacturers say greater choice will result in even lower electricity costs.

A key moment in Maryland's transformation to a more open electricity market came early this month. The state's Public Service Commission ordered the dismantling of the electric supply system by April 2001, a move that will allow residents and businesses to purchase power from a variety of sources.

The order leaves many details unresolved. For example, it will allow utilities such as Baltimore Gas and Electric Co. to recover the costs of longstanding public service obligations required by the current system.

The so-called "stranded costs," which include expenses of building plants, would be picked up by ratepayers regardless of their electric company when competition opens up. Utilities like BGE say that without such cost recovery, out-of-state power marketers unburdened by similar costs will have a huge advantage.

The amount of "stranded costs" is sure to be a flashpoint in the debate, which will play out in PSC round tables and in the General Assembly, which must draft new tax laws for the restructured electric system.

Unlike several state lawmakers, who criticized the PSC order for being short on specifics, manufacturers said they are generally pleased. "We're comfortable that at this point Maryland seems to be taking a reasonable and responsible approach," said J. Alexander Doyle III, chairman of the Maryland Manufacturers Association.

Manufacturers have a lot at stake.

"For many manufacturers, energy costs are 20 percent of costs of goods," said Michael C. Powell, an attorney with Gordon, Feinblatt, Rothman, Hoffberger & Hollander. "Their competitiveness is tied closely to the price of electricity."

Powell represents the Maryland Industrial Group, 24 companies including General Motors Corp., FMC Corp. and W.R. Grace.

In the current system, electricity statewide is supplied by just a handful of companies, including Allegheny Power Co., Delmarva Power & Light, Potomac Electric Power Co. and Baltimore Gas and Electric Co., which exclusively provides electricity to more than 1 million customers in central Maryland.

BGE has about 4,300 industrial customers that use about nine times the power of the average non-industrial commercial user. Benefiting from discount rates they negotiate with utilities, industrial users pay an average of 4.52 cents per kilowatt hour -- almost half what residential users pay. By comparison, other commercial users pay 6.84 cents. Residents pay 8.53 cents.

So while industrial users consume 12.8 percent of BGE's electricity, they make up only about 9.4 percent of the utility's annual revenue.

All this means that when manufacturers and electric companies look at each other, they see dollar signs.

In the meantime, out-of-state competitors are eager to talk with manufacturers. "Right now, they have one option when it comes to services and rates for their electricity," said Mark Palmer, a spokesman for Houston-based Enron Corp., one of the nation's largest marketers of electricity. "You're going to have 15, 20 or 30 companies knocking on the door saying, 'We've got a better idea.' "

Enron sees rates dropping ultimately by 20 percent to 40 percent.

But others are not so sure. "As far as the manufacturing group is concerned, there is no real evidence that they are going to save any real money at all," said Michael J. Travieso, head of the state's Office of People's Counsel.

He noted that the PSC has concluded that Maryland's rates for residential, commercial and industrial users "are at least equal and often below those of nearby states and are below the national average."

Travieso also said the PSC order requires industrial customers like Bethlehem Steel Corp.'s Sparrows Point division to honor its long-term contracts with utilities, even if it means missing out on choices. He is worried that the gulf between industrial and residential rates will grow.

Travieso favors a slower approach. Unlike manufacturers, he wants to give the General Assembly a greater role in deregulation and the PSC a smaller role. "Citizens can hold the legislature accountable," he said.

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