PSC weighs rate reforms

Deregulation fails to deliver competition or cheaper electricity

June 24, 2007|By Paul Adams | Paul Adams,Sun reporter

In an attempt to bring down electricity prices, state regulators are studying reforms that some argue will make it tougher for competing energy suppliers to steal customers from Baltimore Gas and Electric Co. and other traditional Maryland utilities.

The result could be another setback for proponents of utility deregulation, which is predicated on the notion that robust competition will deliver savings to consumers over time.

And as 1.1 million BGE customers in the Baltimore area begin receiving their first power bills with the newly approved 50 percent electric rate increase, regulators find themselves caught between the competing goals of providing near-term rate relief and ensuring that competition can thrive in the future.

"For many people, competition was a means to an end -- the end being that robust competition in a functioning market drives prices down," said Steven B. Larsen, chairman of the state Public Service Commission. "So now the issue is, is competition the goal, or is getting the lowest price the goal?"

The concern centers on efforts to bring prices down by scrapping the system BGE and other investor-owned utilities use to buy their power supply and replacing it with one that better manages market risks.

The PSC is contemplating doing it by mimicking some of the same innovations retail energy suppliers say they rely on to undercut competitors. At stake is the future of a free-market experiment that critics dismiss as a failure because it hasn't delivered on promised savings or competition.

Proponents counter that all they need is time and the right circumstances to prove that competition can deliver better electricity prices than state regulators.

The debate is occurring as multiple states that deregulated in the late 1990s are rethinking their decision and looking for ways to re-engineer a competitive model critics say is hopelessly broken.

In Maryland

In Maryland, the PSC was ordered by the General Assembly to study a number of potential fixes with the goal of achieving lower prices -- a command many acknowledge could clash with the goal of fostering competition.

"Competitive markets drive innovation," said Richard Rathvon, vice president of Reliant Energy Solutions East and president of the Retail Energy Supply Association, an industry trade group. "We believe that competitive markets need to flourish."

Lawmakers passed electricity deregulation in 1999 on the premise that if they opened the market, competition would deliver prices so low that in a few years no one would buy their power from BGE. The utility's future was in using its power lines to deliver electricity that competing suppliers bought for their customers.

But to accommodate the inevitable stragglers who didn't switch providers, regulators designed a means for BGE to go into the market and buy electricity to deliver to its so-called "default" customers.

Critics say the system they came up with is too rigid and wasn't designed to respond quickly to changing market conditions to achieve the best price possible. However, some argue that was the plan all along, reasoning that consumers' desire for cheaper electricity would spur competitors to find innovative ways to provide it.

It hasn't worked out that way so far. Nearly a year after rate caps expired, prospective rivals have yet to impress BGE customers, more than 97 percent of whom still get their electricity from the utility.

Only a handful of competitive suppliers are actively pursuing residential customers, and critics say their offerings provide little incentive to switch.

Changes in markets

Part of the problem is that deregulation rules failed to anticipate major changes in energy markets that would make it virtually impossible for retail energy suppliers to gain a toehold in the Maryland market. The state's deregulation plan for BGE cut rates to pre-1993 levels for six years just as energy prices -- particularly natural gas -- began to climb.

Natural gas, which is among the fuels burned to produce power, often sets the clearing price for electricity in the wholesale market. With wholesale prices rising, competitors found it impossible to undercut BGE's capped price.

Now that rate caps are off, retail suppliers should have a better shot at competing. But many say they are still wary of coming to Maryland because regulators and lawmakers keep threatening to change the rules in response to recent price increases. Any money spent on attracting customers could end up wasted if lawmakers implement some sort of re-regulation plan, they argue.

Consumer advocates see no reason to keep waiting. They want to focus on how to make BGE's electricity cheaper today, rather than clinging to the dream that retail competitors will deliver savings down the road.

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