Assembly's BGE stance will hurt Marylanders

July 07, 2006|By RAY GIFFORD

WASHINGTON -- Maryland will suffer for some time because of the General Assembly's poor, populist choices about electricity.

As expected, the legislature overrode Gov. Robert L. Ehrlich Jr.'s veto of a bill that limits Baltimore Gas and Electric's rate increases and eliminates all of the current members of the Public Service Commission. The bill is a travesty for Maryland consumers and good regulation.

By repealing the rate increases, the legislature effectively denies BGE the ability to pay the competitive price for electricity. While this is hailed as a populist victory over corporate greed, no one has made an effective case that the PSC's determination of the need for an increase was wrong or overestimated BGE's costs. Instead, the legislature chooses to defy simple regulatory math; an electric utility must be able to charge what electricity costs or it will provide too little or slowly go out of business.

BGE's 72 percent rate increase - whether phased in or digested all at once - is certainly large, yet it tracks increases for other energy resources. With natural gas prices up over 300 percent the past few years and the market price for electricity being far above what BGE currently charges, it is no surprise that rates would rise, even substantially.

The legislature did not let these basic economic facts get in the way of a good political skewering of the PSC and Constellation Energy Group, BGE's parent. Because of the legislature's decision, Maryland ratepayers will get to enjoy lower bond ratings for its utility, higher debt costs, less capital expenditures, diminished reliability and all of the other byproducts of a good populist rebellion. A rate-starved utility is a less reliable, less responsive, higher-cost utility in the long run.

Just as disturbing as the legislature's unilateral suspension of the price system is its dismissal of the PSC. The wholesale sacking of the commission bodes ill for the regulatory climate in Maryland. To begin with, pending regulatory matters will be put on hold while a new commission is found and seated. Cases may have to be retried, new commissioners will have to be brought up to speed en masse and even cases that have been decided will have uncertain authority.

In the longer term, the finality and reliability of PSC decisions are now suspect. The precedent for a legislative "veto" of commission decisions will always loom, creating negative consequences for the decisions the PSC made in the first place.

Finally, the independence of the commission is fatally compromised. Instead of a commission devoted to the rule of law, Maryland will have one attuned to the political winds of the legislature. A commission that is always looking over its shoulder at how the legislature might react is not independent and will trim its decisions to suit the prevailing political winds.

The effect of such an uncertain and zany regulatory climate is that investment will flee Maryland, or at least demand a higher return because of the regulatory risk. This probably means higher rates and worse service.

Of course, a committed populist will celebrate all of these things, arguing that these decisions should be made according to political criteria by the elected representatives of "the people." Fair enough. But, as with the rate issue that gave rise to this legislative tantrum, the effect on Maryland consumers will be negative.

A state whose political class yanks around its utilities in this way will drive away capital and investment, lower bond ratings and increase the cost of capital. How this benefits "the people" defies explanation.

Fortunately for current legislators, but unfortunately for future Marylanders, there will be no immediate fallout from this shortsighted choice. Rate increases, reliability concerns and decreased utility investment will play out only over many years.

Also, these increases will come to Marylanders through the arcane and impenetrable formulas of regulatory rate-setting. There will be no political accountability for this terrible decision, only wreckage down the road for a future political class.

Ray Gifford, president of the Progress and Freedom Foundation, is a former chairman of the Colorado Public Utilities Commission. His e-mail is rgifford@pff.org.

Columnist Trudy Rubin will return Tuesday.

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