Electricity numbers still don't add up to good deal

October 21, 2001|By JAY HANCOCK

IN A RARE example of harmony, both Baltimore Gas & Electric and state regulators agreed that a column here on electricity deregulation was "distorted" and did not get the "facts straight."

The column chastised regulators for costing Baltimore-area ratepayers millions as the government moves to introduce competition to the electricity business.

BGE, the Public Service Commission and Maryland's Office of People's Counsel disputed my conclusion that Baltimore-area consumers could have done better than the 6.5 percent cut and six-year freeze on electric rates won under BGE's deregulation deal.

At the heart of the argument is the cost footed by customers to cover what BGE claimed was a decline in the value of its generation plants. I figured the tab for consumers to be an average of $4.60 per month, every month for every household, between now and 2006.

This is the famous "stranded cost" payment, the gimmick that launched a thousand hearings. I argued that BGE did not deserve stranded-cost compensation, that the payment is part of BGE's rates, that it limits competition and that it keeps metro Baltimore electricity costs higher than they otherwise would have been.

The stranded-cost payment exists because BGE and other utilities feared that their plants, built in good faith when regulation protected their profits, would be low-value white elephants in a deregulated world.

In response, regulators in many states guaranteed utilities some continuing revenue to help retire old mortgages - even after the launch of competition.

The revenue would equal the difference between the (supposedly) bloated book value of the generators and the (supposedly) much lower market value that would result after deregulation.

But there was a problem. The stranded-cost gap disappeared in real life. Instead of being worth less than book, generation plants in most cases turned out to be worth much more. As electricity competition progressed across the country, eager investors bid up the prices of all types of generation assets - even nuclear facilities.

It's too late

As a result, the reason for BGE's stranded-cost recovery payment has disappeared.

But it's too late. The payment is part of a deregulation settlement being vigorously defended by everybody who signed off on it. BGE and affiliate Constellation Energy will enjoy $528 million in total stranded-cost collections.

With me so far?

Stranded-cost payments are not a meaningless bookkeeping figment. They're real money, so real that Wall Street's hottest products this year include tradable bonds backed by the stranded-cost revenue that utility customers are locked into paying.

"I am surprised that columnist Jay Hancock did not check his numbers with my office," writes Maryland People's Counsel Michael Travieso, whose job is to represent utility consumers.

What numbers? The $528 million? That's the total stranded-cost collection that BGE and Constellation are entitled to under the Maryland settlement.

The $4.60 per household per month? That's the average of the stranded-cost component of consumer rates over the next five years, multiplied by the average Maryland household energy use per month according to the U.S. Energy Department.

My contention that Constellation made a paper gain on its Calvert Cliffs nuclear plant?

Last month, NAC International, a big Atlanta-based energy consultancy, analyzed the market value of U.S. nuclear plants based on how much buyers are paying for each megawatt and each year remaining on a plant's license. Using NAC's formula and the price Constellation is paying for the Nine Mile Point nuclear plant in New York, Calvert Cliffs is worth about $1.4 billion - a huge premium over the facility's depreciated book value of $1 billion.

But that might be aggressive. Let's give BGE a break and assume Calvert Cliffs is worth less than book - say, $800 million. Even then, the rise in market value of Constellation/BGE's conventional plants is enough to erase that shortfall, wipe out stranded costs and generate a companywide gain that could have been shared with customers.

That's one way rates could be lower.

Regulators say that even if BGE were awarded no stranded-cost recovery, the company's expense structure would legally entitle it to charge prices similar to what it gets now.

Propping up rates

OK, but BGE's stranded-cost deal is still propping up rates by acting as a competition deterrent. Even if you fired BGE, your bill would still include the $4.60 for stranded costs, and your new utility would have to send the money to BGE/Constellation.

How can outside companies compete when they must pad their bills and then rebate the extra money to an entrenched rival?

Without a stranded-cost charge, companies in the Mid-Atlantic Power Supply Association (MAPSA) would be seeking your business, undercutting BGE/Constellation's rates and perhaps forcing BGE to cut prices.

Travieso argues that the present level of wholesale electricity prices would keep competitors from beating BGE/Constellation's rates even without a stranded-cost handicap. But it's early. Generation capacity is coming on line that should reduce wholesale prices.

MAPSA is spending tons of money on lawyers to try to overturn Constellation's stranded costs. They're not doing it for fun.

Like all deregulation deals, the BGE settlement was a complex cocktail of compromise. Regulators argue that if they had dug in on stranded costs, they would have had to give ground elsewhere.

Maybe. But the reason utilities fought so hard for stranded-cost compensation was to fend off competition and preserve their regulated revenue for as long as possible.

Seems like it's working.

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