Rate Phase-in On Table

Dazzling hopes and deregulation

March 09, 2006|By PAUL ADAMS | PAUL ADAMS,SUN REPORTER

When lawmakers in Annapolis were sold on the merits of electricity deregulation in 1999, proponents of the plan pinned their hopes on two assumptions that didn't come to pass.

One was that energy costs would stay flat, as they had for a decade. The other was that competitors would flock to Maryland to compete against Baltimore Gas and Electric Co. and other investor-owned utilities.

At the time, many were dazzled by the dot-com boom's promise for a new kind of economy. A bold, growing behemoth in Houston called Enron Corp. was making compelling arguments in favor of competition in power markets. Several states were jumping on the deregulation bandwagon, furthering a sense that Maryland customers could save billions of dollars if the electric market was set free.

"I don't think any of us in our wildest dreams when we did this in 1999 could have predicted what was going to happen to the price of natural gas or coal, or what happened to the price of petroleum fuels, and that's what's driving this," said state Sen. Thomas M. Middleton, a Southern Maryland Democrat who says he still believes that deregulation was good for consumers.

Indeed, fuel prices soared, competitors stayed away and BGE residential customers face an average 72 percent rate increase in July as the state moves toward market prices for power. That amounts to $743 more per year for the average customer.

Consumer activists are quick to say, "I told you so," much as they predicted when they fought the plan seven years ago. Many argue that consumers would have been better off had the industry stayed regulated, and a vocal contingent of lawmakers in Annapolis is pushing to turn back the clock.

Other experts contend that deregulation isn't to blame for the plight of power users; rising fuel prices are. Eventually, they say, the lifting of "price caps" in July might spur the kind of competition that deregulation proponents say over decades transformed other formerly regulated industries such as telecommunications and the airlines.

"It's important for people not to place this on the back of deregulation and that deregulation caused this, because nothing could be farther from the truth," said Mark Case, vice president of regulatory services for Baltimore Gas and Electric Co. "It's all about fuel prices."

Regulators and industry officials say much of the outrage that lawmakers and consumers are directing toward BGE this week can be traced back to a decision more than six years ago to cap residential power rates for six years. The idea was to reward customers with cheap energy while allowing time for competition to become established in Central Maryland.

The plan was a success in that BGE customers collectively saved more than $1 billion in electricity costs by capping power prices at pre-1993 levels for six years. In essence, the 1999 legislation forced BGE to go to power suppliers and negotiate long-term supply contracts at rates that would allow it to remain profitable during the six-year period.

If it hadn't made that move, the utility would have been hit sooner with the rising cost of buying electricity, forcing it to go to the state Public Service Commission to ask for an increase. That would have meant rate hikes spread over the past six years, rather than in one lump sum this July.

"Under regulation, every month that fuel prices went up, you would have been paying increased [electricity] prices every month," said Bert Wilson, part owner of South River Consulting, a Baltimore energy consulting firm.

But some argue that the rate caps failed by not anticipating that the cost of natural gas, coal and other fuels used to make electricity would climb by far more than 100 percent -- in some cases, more than 200 percent -- in the span of a few years.

With BGE's rates stuck at below-market levels, would-be competitors were frozen out of the market. No other supplier could produce or procure power for a lower price -- or even the same one -- as BGE could, as long as the rate caps were in effect.

"The incentive never developed for residential competition," Wilson said.

The Maryland Office of the People's Counsel, a state utility watchdog agency, tried to warn lawmakers in 1999 that competition comes slowly to industries that were once regulated. Congress passed the Telecommunications Act in 1996 partly out of frustration over the lack of phone competition and choice more than a decade after the breakup of "Ma Bell."

"I think those legislators who were there at the time, if they were listening to us, they should have heard that message," said Theresa Czarski, deputy people's counsel.

But industry officials say it might not be long before BGE has competitors, which could lead to marginally lower prices for those who switch providers.

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