Flipping The Switch

Low bid: Maryland sets up an Internet auction next week for electricity suppliers who want the state's considerable business.

Deregulation

March 23, 2004|By Lorraine Mirabella | Lorraine Mirabella,SUN STAFF

As Maryland moves toward a deregulated power market, the state is pooling its considerable buying power to get a deal on electricity for state agencies and facilities such as universities, highways, office buildings and prisons.

The state is planning a first-of-its-kind Internet auction to take advantage of the competitive market. The hope is that electricity suppliers will attempt to undercut one another's bids to win an estimated $70 million worth of state business.

The "reverse" auction - set for next Tuesday - will give suppliers a chance to bid for about three-quarters of the state government's power needs in areas served by Baltimore Gas and Electric Co. and Potomac Electric Power Co.

FOR THE RECORD - An article in Tuesday's editions about electric deregulation in Maryland said rate caps for residential and commercial customers in the Allegheny Energy service area in Western Maryland will expire in December. In fact, only Allegheny's commercial rate caps will expire in December. The utility's residential rate caps will remain in place until December 2008. The Sun regrets the error

The state government spent $94 million on electricity last year, with an estimated $65 million to $70 million of that in the BGE and Pepco areas, figures from the state's Department of General Services show.

The state is one of the biggest power users in Maryland and it is aiming to lock in the lowest possible cost as price caps imposed in 2000 to ease the state's transition to a deregulated market start disappearing this summer.

By requesting bids now, and locking in rates with two-year contracts, state officials said, they hope to avoid price spikes.

The alternative, state officials said, would be to roll the dice in a market where prices can change from one day to the next and the overall trend is typically upward - an average of 33 percent in newly deregulated markets.

"We're in a time when energy prices are going up," said Boyd K. Rutherford, secretary of the Department of General Services. "Hopefully, we can moderate that. This reverse auction should help contain some of the escalation."

Higher prices are expected in part because wholesale energy costs are rising.

"The intent is to mitigate that increase by leveraging the market," said Michael Zimmerman, director of procurement for the Department of General Services.

"By forecasting our demand, and giving [suppliers] an opportunity to have a customer this far out, we feel strongly we'll at least be able to reduce that rate of increase," he said.

"When units of government pool together and buy energy - assuming they got a good deal - that's in the best interest of taxpayers because taxpayers pay for the energy needs of state agencies," said Janee Briesemeister, a senior policy analyst for Consumers Union.

Deregulation has produced extremely volatile energy markets in some states, but a competitive electric market has a better chance at succeeding in Maryland because the region has uniform rules in place for its power grid, the Pennsylvania-New Jersey-Maryland Interconnection, said William Hogan, a professor of public policy and administration at Harvard University.

"Maryland is within the PJM system [the grid operator], which is coordinating the wholesale market," Hogan said. "The structure of the wholesale market is as good as you can get. The people who want to provide state agencies with power can be competitive over a large geographic area."

The state approved deregulation of the electricity market in 2000. To smooth the transition from a system of tightly regulated rates, state utilities agreed to cap rates for specified periods.

While the caps insulated customers from a volatile energy market, they also kept rates artificially low, making it difficult for other electric suppliers to compete with local utilities.

Rate caps expire June 30 for commercial customers in areas now served by Baltimore Gas and Electric Co. and for residential and nonresidential customers now served by Potomac Electric Power Co. in Montgom- ery and Prince George's counties, and for residential customers served by Conectiv Power Delivery on the Eastern Shore. The caps are to be lifted Dec. 31 for residential and commercial customers in Allegheny Power Co.'s service territory in Western Maryland.

Baltimore Gas and Electric Co. residential customers will have their rates deregulated in June 2006.

Once the first rate caps expire, the utilities will be required to offer a "default" service to customers who do not choose an alternate supplier.

The Maryland Public Service Commission is overseeing a process in which the states' four utilities will solicit bids from power suppliers to meet the needs of business and some residential consumers.

When those contracts are in place, the utilities will announce their prices for so-called "standard offer service" - the default service for users who don't choose an alternative supplier. Utilities will continue to charge regulated rates for transmitting electricity over their lines to businesses and homes.

As the first price caps expire, commercial users face the same challenge as the state government - a search for the lowest possible rates. Businesses are trying to form buying groups to increase their buying power, but few can hope to match the negotiating power of the state.

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