BGE rate to climb higher in June

5.5% increase tied to U.S. rules driving up wholesale prices

Sun exclusive

January 23, 2008|By Paul Adams | Paul Adams,SUN REPORTER

Baltimore Gas & Electric's residential customers will pay an estimated 5.5 percent more for electricity starting in June, largely as a result of federal rules that are driving wholesale energy prices higher, state officials and industry experts said yesterday.

The increase will add about $100 to the average customer's annual utility bill, although the amount will vary depending on usage, the state Public Service Commission said. When combined with increases imposed since rate caps expired in 2006, BGE customers will be paying 85 percent more for electricity than they were before the General Assembly approved deregulation in 1999.

News of the higher prices follows a complaint the PSC filed last week with the Federal Energy Regulatory Commission, blaming outdated wholesale market rules for handing windfall profits to certain Maryland power generators. A different set of FERC- approved rules contributed to the latest price increase, the PSC staff said. Both sets of rules and other factors driving wholesale electric prices higher are at the heart of the PSC's current drive to bring utility rates down.

But more than a year into that effort, the latest increase shows just how difficult it is for state regulators to influence the federally regulated wholesale energy market. Many policy decisions affecting prices in Maryland are made in Washington with only limited input from state regulators.

"Because utilities no longer own generation plants that the state can regulate ... we're at the mercy of what comes out of those wholesale energy markets," said Bill Fields, an attorney for the state Office of the People's Counsel, which represents utility customers.

The PSC staff calculated the rate increase after BGE and other investor-owned utilities in Maryland solicited bids from wholesale electricity suppliers last week. The utilities, which gave up their power plants as part of deregulation, are required to solicit bids twice a year to purchase a portion of their electricity supply for the coming year. Those bids determine what price is passed on to customers.

Results of the latest round show that wholesale energy costs continue to climb, in part because of federally approved rules aimed at addressing the region's growing electricity shortage. The state imports about 30 percent of its power from other states and could face an energy shortfall as early as 2011.

"It will keep getting worse," said Skip Trimble, a senior energy consultant with South River Consulting in Baltimore. "Demand is outstripping supply ... but nobody is building anything new."

The PSC staff blame new wholesale market rules that reward power producers in areas where electricity supplies are dangerously tight. PJM Interconnection, which operates the region's power grid and wholesale energy market, implemented the regulations in the spring with approval by the Federal Energy Regulatory Commission.

These "capacity" charges are designed to entice power companies to build new power plants and transmission lines to meet rising demand. After the new rules took effect in June, capacity charges paid to generators soared about 2000 percent overnight, Trimble said. The problem is most acute in Central Maryland, which is home to BGE's 1.1 million customers.

The capacity charges are controversial within the industry because they put more money in the pockets of power companies regardless of whether they use the added profits to build new power plants. BGE's corporate parent, Constellation Energy Group, is the state's largest producer of electricity and, consequently, a primary beneficiary of the regulations.

If more generation, or "capacity," is built, the premium Maryland customers pay for access to power should fall. But it hasn't happened yet, and energy experts say any improvement could be years away.

"This is a federal thing," Trimble said. "It wasn't something that Constellation [Energy Group] did, and not something the state did."

Mark Case, BGE's vice president of regulatory affairs, said capacity charges were only partly responsible for the 5.5 percent increase. The rising cost of fuels used to make electricity was likely a bigger factor, he said. He pointed to PJM data showing that the cost of fuel inputs climbed about 15 percent for generators during the past year.

"I would say that energy prices are driving it," he said.

The PSC staff calculate that BGE's electricity rates have climbed more slowly than other energy costs since deregulation was passed. Since 1999, the price of heating oil has climbed 198 percent; regular gasoline 140 percent and natural gas 92 percent. Natural gas is a major driver of wholesale electricity prices, even in areas where it is not the primary fuel for power plants.

BGE also points out that its per-kilowatt charge for electricity remains lower than nine of the 10 Mid-Atlantic and Northeast states with deregulation. Pennsylvania's rates are lower, but that state has yet to fully make the switch to market-based rates, Case said.

Constellation has proposed several generation projects that would help lower the premium Marylanders pay, including a plan to build a third nuclear reactor at Calvert Cliffs for an estimated $4 billion. But the company has yet to make a final decision on that and a few of the other projects it has in the works. Building a new nuclear plant would take at least until 2015.

The PSC doesn't want to wait for the industry to respond to the region's energy shortfall. It wants to scrap the way BGE and other utilities buy power from the wholesale market and partially re- regulate the industry. The commission is studying a plan to require utilities to enter into long-term contracts with power generators, which would construct new plants to meet the area's growing energy needs. The commission is expected to finalize those plans within the next few months.

paul.adams@baltsun.com

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