Governor O'Malley's chance to reshape PSC

January 18, 2007|By John A. Riggs

Gov. Martin O'Malley promised during his campaign to fire the Public Service Commission for approving huge electricity rate increases. Ironically, this will occur 100 years after such state commissions were established to take politics out of ratemaking.

Although the PSC was a useful political issue for Mr. O'Malley, a politicized commission serves no good purpose. Therefore, assuming he follows through on his threat, the new governor would be wise to select widely respected, politically neutral experts.

While trying to create more competition in electricity six years ago, Maryland imposed a rate freeze to buy time for competition to work. But skyrocketing fuel prices set the stage for explosive rate increases.

In June, the commission approved residential increases of 72 percent for Baltimore Gas and Electric Co. and lesser amounts for Pepco and Delmarva Power. When the General Assembly fired the commissioners, the Maryland Court of Appeals overturned its action. But the justices signaled that the commission could be reconstituted, and the governor could then appoint new commissioners.

Although the commission has stretched out the rate increases, candidates seeking to deflect blame traded accusations during the recent campaign. Democrats blamed Gov. Robert L. Ehrlich Jr.'s "business-oriented" commission. Mr. Ehrlich pointed at the legislature's "misguided 1999 deregulation law."

Their fear of voter retribution was understandable. In California, a residential rate freeze contributed to the 2000-2001 electricity crisis, with its wholesale price increases, rolling blackouts, market manipulation, utility bankruptcy, and the recall of Gov. Gray Davis.

But a century ago, state regulatory commissions were one of the reforms of the Progressive Era. Anti-monopoly sentiment yielded to the belief that regulated monopolies could avoid wasteful duplication, and that apolitical experts could reconcile private and public interests.

Samuel Insull, an industry giant who headed Chicago's Commonwealth Edison Co., shocked his colleagues in 1898 by endorsing state regulation. Arguing that monopolies could provide the lowest-cost service - and that competition was therefore "economically wrong" - he contended that state regulation could ensure freedom from competition, guarantee a fair return and prevent municipal takeovers.

Citizen outrage at monopoly abuses, combined with the mutual desire of utilities and reformers to eliminate regulation by corrupt city governments, helped Progressive governors Robert M. La Follette in Wisconsin and Charles Evans Hughes in New York create the first commissions in 1907. Most observers considered these commissions to be knowledgeable and above politics. Maryland established a commission in 1909, and 24 other states followed by 1914.

As Mr. Insull predicted, utilities received protection from competition and the threat of municipal takeover. And ratemaking was designed to give them enough revenue to pay reasonable expenses and receive a reasonable return.

Consumers were satisfied too. Technology and growing demand in the two decades after 1907 benefited both sides as output grew and prices dropped.

Over time, however, keeping politics out of regulation has proved difficult. Developments in an extremely complicated industry often lead to rates that are hard to explain, painful to accept and easy to criticize.

Elected officials have blamed commissioners for approving steps they may have known were necessary. PSC Chairman Kenneth D. Schisler says many legislators were briefed in advance and privately acknowledged the reasons for last year's rate increases, but none was willing to support them publicly.

The die is apparently cast. The commissioners, including two former legislators and a former utility employee, are no doubt exploring other employment opportunities. The question is who will replace them.

Mr. O'Malley should seek experts who are independent in fact and in appearance - no more former legislators or utility officials - and who can balance the public's desire for low rates with the utilities' need for sufficient revenue to invest in system improvements. He should also seek bipartisan support for his nominees, making it more difficult to attack the next unpopular commission decision for partisan reasons.

After all, history shows that depoliticizing ratemaking can be good politics as well as good government. After his service as governor, Mr. La Follette of Wisconsin served for two decades in the U.S. Senate, he ran for president in 1924, and in 1957, a Senate committee led by John F. Kennedy named him as one of the five greatest senators ever. Mr. Hughes of New York was appointed to the Supreme Court, lost a close presidential election in 1916, and later served as secretary of state and chief justice.

John A. Riggs is a senior fellow at the Aspen Institute and former staff director of the U.S. House of Representatives Energy and Power Subcommittee.

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