BGE rate increase: Pay now or pay later

Residential electricity bills will inevitably go up, but part of the sum can be deferred interest-free

May 24, 2007|By Tricia Bishop | Tricia Bishop,Sun reporter

Now that Baltimore Gas and Electric Co. has the go-ahead to raise electricity rates by 50 percent next month, Marylanders also have a choice: Pay the full increase right away or spread it out under a deferral plan.

What to do? Area economists think the decision is pretty clear:

"It's a no-interest loan, everybody should take it. ... It's a no-brainer," said Richard P. Clinch, director of economic research at the University of Baltimore's Jacob France Institute.

"It's basically free money. You get a chance to earn some interest on that," Clinch said. "And, especially for lower-income individuals, it gives you a seven-month window to ease into the really big increase. That's more time to adjust your budget accordingly."

Consumers who "opt in" to the deferral plan approved yesterday by the Maryland Public Service Commission essentially choose to take the increase in three parts, reaching the full market rate in January and paying back the deferred amount starting in April through the end of 2009.

Those who choose to defer the increase have until June 30 to sign up online or by calling BGE. Consumers who do nothing automatically begin paying the full increase, which takes effect next week.

In a statement, BGE President Kenneth W. DeFontes Jr. said the company will send details about the plan to customers within 10 days "to enable them to make decisions that are appropriate for them and their families."

Company officials did not take a position on whether consumers should defer the increase.

With next week's full increase, the average monthly BGE electric bill will be about $139, according to Mark Case, vice president of regulatory services. (Actual bills vary widely based on consumer use.) But for those who defer, here's how the plan and pricing break down:

Average bills for customers who opt into the plan will be about $114 through September (18 percent lower than market rates).

From October through December, their average bill will be about $128 per month, or 8 percent lower than full price.

By January, they'll be paying the full $139 per month average, which represents a 50 percent price increase over current rates.

Then, in April, their bills will be about 5 percent higher - an average of $146 - than those who didn't opt into the program, when a charge that represents the seven months of deferred payments will appear. But the payback is spread out over 21 months, lessening its impact.

If customers end their service anytime during the deferral or payback period, they will have to settle up and pay an exit fee.

In a 106-page order issued yesterday, the PSC pointed out that summer electricity rates are higher than non-summer rates, so bigger bumps in October and January, when prices are lower, might be easier to bear.

The move to increase electric rates, which followed a deregulation of the industry in Maryland, has led to angry consumers and bitter political exchanges. Politicians called for PSC reforms and last year the legislature put a cap on the first phase of the rate rise, then estimated to be about 72 percent.

Market fluctuations have dropped that number slightly, leaving a roughly 50 percent price increase to be implemented. Yesterday's order outlined the details for the rest of the increase and the deferral.

The commission had considered several deferral proposals, including ones outlined by BGE and the Office of People's Counsel, which represents Maryland's residential utility customers.

But PSC members ultimately approved the system developed by its staff, which is independent of the commission. In testimony before the PSC, a staff representative said enrollment in the opt-in program was likely to be low based upon other utility company experiences and would probably mean BGE would have to defer between $2 million and $20 million in revenue.

Anirban Basu, chief executive of the Baltimore economic consulting firm Sage Policy Group Inc., isn't quite so sure, however.

"Because it's interest-free, this will - like so many other interest-free offers today - [probably] prove very tempting," said Basu, adding that he would prefer people took the full brunt of the increase right away and learned sooner to change their energy-consumption behavior.

BGE, which had originally suggested a two-step phase-in with interest charged, agreed to forego that fee last month and said instead that its "stockholders will pick up the carrying costs associated with serving those customers who postpone full market rates until January 1, 2008."

The more people who postpone, the more BGE will have to carry.

The company also has to pay for multiple advertisements outlining the deferral option in at least five newspapers, including The Sun, and informational mailings sent to its 1.1 million residential customers, according to the PSC order. Over the past three months, BGE has already paid to include inserts in customer bills describing a possible deferral.

tricia.bishop@baltsun.com

Opting in

BGE customers who want to defer the rate increase can do so online at www.bge.com as soon as today or by calling 888-234-0505. They have until June 30.

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