Though he's never been elected to office, Steven B. Larsen has one of the most powerful - and unenviable - jobs in state government.
The chairman of the Public Service Commission has an impact on the profits of corporate giants and the pocketbooks of utility ratepayers. He also influences the political fortunes of Gov. Martin O'Malley, who appointed him last year with a mandate to fix the state's deregulated energy market. At the top of Larsen's agenda: investigating the more than 70 percent rate increase that Baltimore Gas & Electric customers received over the past two years.
The chairman of the state Public Service Commission discusses fixing the energy market, and how the state can deal with a shortage of energy that experts expect by 2011
In a January report to lawmakers, the commission criticized the 1999 settlement that moved Maryland toward deregulation, saying it favored Constellation Energy Group, BGE's parent company, at the expense of ratepayers. Constellation says the report distorts the facts and is a politicized attempt to rewrite history. The conflict heated up last week when the company said it would sue the state to recover $386 million in nuclear decommissioning fees that it was forced to give up as part of legislation passed in 2006 to deal with the BGE rate increase.
Against this backdrop, the commission is grappling with a projected energy shortfall as early as 2011, and considering proposals to partially re-regulate the industry.
After months of study, it seems the commission has concluded that mistakes were made in the lead-up to deregulation, and that there may be a way to implement some form of re-regulation. What might that look like and how would it affect utility rates?
Well, the form of re-regulation that we determined to be the most practical was the idea of incentivizing new generation through long-term contracts [for electricity supply] to be executed by the utilities. We concluded that what many people think of as re-regulation, which is simply getting those power plants back under our control, is not practical. It's prohibitively expensive and would have a lot of legal issues.
So the commission doesn't think the industry can meet the challenge of building new plants in a timely fashion by itself. Why is the market failing in that respect?
Like any market, these are issues of supply and demand, and if you own supply in a market in which demand outstrips supply, it can be to your advantage to maintain shortages to keep prices high. I'm not suggesting there's anything wrong with that. That's what for-profit companies do. But I think it has resulted in Maryland in higher prices than we would otherwise be paying if there was a better balance between demand and supply. So, if we're going to rely on the market to solve our problems, our problems may not be solved because the market participants have different financial incentives than, for example, a regulator does in trying to get the lowest rates for ratepayers.
So by directing the utilities to enter into long-term contracts, we essentially create a market incentive to bring new generation in, but also because it's under a long-term contract with the utility it can help essentially capture the economic benefits for the ratepayers that might otherwise go to the owner of the power plant.
So is it going to require legislative action, or does the commission have the authority to make a lot of these changes on its own?
The commission has the authority to require utilities to enter into long-term contracts. What we've told the General Assembly is that unless they tell us otherwise, we would this summer begin the process of doing so.
Do you have, though, a legislative agenda for this session, some things you'd like to see lawmakers do beyond what you just talked about?
There are a couple of bills the commission has looked at. One would expand our subpoena power and ability to get documents from, not just regulated companies, but any unregulated affiliates we have. That was a recommendation that came out of the report on the "stranded costs" [fees paid to compensate Constellation for the decline in the value of its power plants] and decommissioning liability. We determined in that study that decommissioning funds - that is, funds that are supposed to be available down the road for the decommissioning of the nuclear power plants - which ratepayers have funded, are being held in internal reserves at Constellation that we don't regulate. And I think we clearly need broad regulatory authority over those decommissioning funds. Another bill that we will be proposing to the General Assembly is legislation that would allow us to recover the costs of an investigation or inquiry from the regulated company being investigated.
As we've talked about before, deregulation leaves Maryland consumers at the mercy of wholesale energy markets, which are federally regulated. What are the flaws in that market, as you see it, and what can the commission do about it?