In California's footsteps?

April 19, 2006|By CARL WOOD

The high costs Californians have experienced with deregulated electric power could foretell the future for Marylanders.

The 72 percent rate increase Baltimore Gas and Electric Co. customers face this summer is a familiar scenario for Californians.

In California, an electric deregulation scheme was pushed through with smiles and happy faces all around. A few years passed with utilities and generators repositioning generating assets outside of state cost-of-service regulation, while retail rates were frozen or capped.

Then the price caps came off. The result was a shocking retail rate increase driven by wholesale electric prices.

Panicked legislators realized that they gave up jurisdiction over generation prices to the federal government. Federal officials stood by passively as the crisis unfolded.

California responded by directly attacking the underpinnings of deregulation, with only partial success. The legislature banned further selling of generating assets by utilities in January 2001 to preserve transparent, cost-of-service state regulation, but we could not recapture generating units already sold to unregulated profiteers.

Deregulation was sold to state legislatures with the assurance that the Federal Energy Regulatory Commission (FERC) would ensure that wholesale electricity market prices met the statutory "just and reasonable" standard, which historically has meant cost of production plus a fair profit. But in California, FERC allowed wholesale prices to rise to 10, 20, even 50 times the actual cost of producing the electricity.

The California Public Utilities Commission and the state attorney general instituted massive legal proceedings against the profiteers, but were stymied for several years by FERC until federal appeals courts forced access to the smoking gun information about market manipulation that FERC had sat on. The cases are still not resolved, although many have been settled for cents on the dollar. Justice delayed was justice denied.

Our continued exposure to wholesale markets will result in rates for this summer that are as high as we had during the 2000-2001 energy crisis: a statewide average residential electric rate of over 14 cents per kilowatt hour, with usage above about 1,100 kilowatt hours priced at over 30 cents for most parts of the state. A significant portion of that is for paying off energy crisis debts and high-cost wholesale contracts, without any significant offsets from the "remedies" provided by the FERC proceedings. By comparison, BGE charges an average of 8.2 cents per kilowatt-hour, and the cost is to go to 14 cents beginning July 1, a BGE spokesman said.

Will California's experience be Maryland's future?

Maryland has the opportunity to do the most important thing - recapture generation for state-level cost-of-service regulation - by conditioning the merger of Constellation Energy Group and Florida's FPL Group on the return of generating plants to BGE under state cost-of-service regulation. Consumers want an end to deregulation.

What is the alternative? Continued dependence on the wholesale market, and that is not pretty.

A recent study by the chief economist of the Virginia Corporations Commission, based on partial data, suggests that in the last six months of 2005, ratepayers in the multistate regional wholesale market where BGE buys its bulk short-term electricity lost nearly $6.5 billion because of a FERC-approved market structure that is set up to favor the big sellers with market power at the expense of consumers.

Those who make money from extortionate deregulated profits keep repeating the mantra that deregulation is irreversible, that you can't put toothpaste back into the tube. But California's experience indicates that we need to do exactly that.

Our ill-conceived experiment with electricity markets left us with tens of billions of dollars in unnecessary costs that we will be paying off for years, on top of the "market prices" that reflect sellers' market power. By protecting the utility generation that was still under state regulation, we stabilized a major component of rates and reduced consumer exposure to volatile market prices.

Maryland is at a crossroad. It can continue down the path that led to California's energy catastrophe, wishing and hoping for better results. Or it can return to a system of public regulation of this essential utility service that served us well for 70 years based on a transparent relationship to cost of service under prudent management. That system promoted stability, equity and growth in the American economy for 70 years. It shouldn't be a hard choice.

Carl Wood, a consultant to labor unions who has been asked by a public interest group to serve as a policy witness about the power situation in Maryland, served as a California public utilities commissioner from 1999 to 2004. His e-mail is carlwood@dc.rr.com.

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