Maryland's deregulation debacle

March 17, 2006|By BRAD HEAVNER

Let's say you're a company that is guaranteed a 9 percent return on investment. No matter what mistakes you make or what happens because of situations beyond your control, your profit is guaranteed. A state agency, worried that you would otherwise gouge consumers since you operate as a monopoly, meets regularly to make sure you are charging enough to make a 9 percent return.

But it's the middle of the dot-com bubble and you see other companies bringing in 30 percent returns. Wall Street used to love you, but now they love those crazy Silicon Valley startups more.

So you cook up a scheme to split your company in two. Division A delivers the product to consumers and still has limits on how much it can charge based on its costs. But Division B makes the product and can charge Division A prices that have nothing to do with the costs of making the product. If another company is charging more for the same product, Division A can charge that much, too.

You convince the Maryland General Assembly that this is a good idea because, as everyone understands, the free market always knows best. You run ads in the newspaper saying "competition promises a future of continued low rates" and "you can be sure you'll experience no unexpected shocks on your monthly bill."

And while you're throwing rules out the window, be sure to discard the ones that require you to run programs that benefit the public.

This is the story of Maryland utilities and deregulation.

The latest chapter in the story was Baltimore Gas & Electric Co.'s announcement of a 72 percent rate increase that would cost consumers an estimated average of $743 more a year per household. It would not be happening without deregulation. Other utilities in the state have already increased rates nearly as much.

A few of us opposed deregulation in 1999 because we predicted that it would land us exactly where we are today. Nobody can turn back the clock, but we can at least act quickly to put the puzzle back together.

Here are four things lawmakers should do for the citizens of Maryland:

Don't eliminate the rate caps all at once in July. Phase them out slowly. BGE has been making strong profits over the past several years. Now its costs are going up. It needs to share the hit as much as we do.

It can't have it both ways - a free market when it's in BGE's favor and a shield against all risk when it's not. Averaged over a few years, its profit margins will still be fine.

BGE has been portraying the rate caps as a subsidy to consumers, but its costs have been low and the capped rates have been more than enough to give BGE strong profits - $150 million last year. The company is misleading the public by making it sound as if it has been losing money and now needs to make up for it. BGE can afford to operate on thin margins.

Block the merger between Constellation Energy Group Inc., BGE's parent company, and Florida's FPL Group Inc. unless there's a benefit for Maryland ratepayers. Constellation Energy is an attractive target for a buyout because captive ratepayers have been paying for valuable assets for years. Now Constellation is proposing to sell those assets and pocket the profits.

The companies predict that the merger will result in savings of $250 million. That money could go a long way toward dampening the rate increase.

Set up aggressive programs for energy efficiency. Before deregulation, utilities were required to run programs that reduced our demand for electricity. Since deregulation, the level of attention given to energy efficiency in Maryland has been embarrassingly low.

Cost-effective energy-efficiency opportunities should be a direct response to increased prices and tight supplies. Using state funds to kick-start those programs would be money well spent.

Start reregulating the electricity market. This is an inherently uncompetitive industry. FPL didn't come to Maryland to compete with the local utility. It is buying the local utility. It is not interested in competition. It is interested in market power.

There is no reason we cannot restore authority to the Public Service Commission to oversee the management of utilities and force them to engage in long-term planning for the best interests of Maryland consumers and small businesses.

Deregulation has been a failure. We were promised more competition and lower rates, and we are getting the exact opposite. Now it is time to fix the mistake.

Brad Heavner is director of the Maryland Public Interest Research Group. His e-mail is

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