PSC weighs shift in utilities' way of buying power

July 10, 2008|By Paul Adams | Paul Adams,Sun reporter

The Public Service Commission wants to gauge whether Maryland utilities could lower electric bills by owning their own power plants or entering into long-term contracts with power generators, a new regulatory filing shows.

In its latest step toward reforming utility regulations, the commission ordered the state's investor-owned utilities to evaluate plans to buy power using a combination of short-, medium- and long-term supply contracts. Utilities would plan power purchases 10 to 15 years in advance - including the possibility of owning power plants, much as they did before deregulation.

Currently, the state requires utilities to buy all of their power through rolling, two-year contracts awarded through a competitive bidding process. Consumer groups have criticized that approach, saying it is similar to an investor putting all of his investment dollars in one kind of stock. They argue it contributes to the high prices and volatility consumers have experienced since the transition to deregulation.

The plan under consideration is to mitigate risk by diversifying supply, much as an investor's portfolio might contain a mixture of different kinds of stocks and bonds.

"The idea behind these 'portfolio' approaches ... is to do what any good financial planner would tell you to do, which is diversify," said Doug Nazarian, the PSC's general counsel. Nazarian will take over as PSC chairman when Stephen B. Larsen steps down next month.

For now, the commission's recent order is just a request for more information. The PSC will use data collected from utilities to help it determine whether money can be saved by scrapping the current system. Baltimore Gas and Electric, Pepco and other investor-owned utilities must submit their analyses by October, after which the commission will hold additional hearings.

BGE declined to comment on the order until after it has submitted its analysis to the commission. BGE's parent, Constellation Energy Group, is the state's largest supplier of power.

Mack Wathen, vice president of regulatory affairs for Pepco Holdings Inc., said the commission is taking the right approach in gathering more data before drawing any conclusions. The company said it is open to the idea of a "managed portfolio" approach, provided the right rules and conditions are put in place.

Power generators are skeptical of the idea, saying it could disrupt the competitive power market. They also have testified that there is currently little, if any, market for power contracts extending 10 and 15 years. Generators are wary of long-term deals because they can't predict what will happen to the price of natural gas and coal - both key fuels used to produce electricity.

Skeptics also point out that it may be foolish to enter into such lengthy contracts at a time when power prices are high, as they are today. If power prices fall five years from now, consumers would be stuck paying more than the market price for electricity for years to come.

The PSC order advances an idea put forth by consumer advocates last year. The Maryland Office of the People's Counsel and AARP both contend that consumers would benefit if utilities took the long view when buying electricity for their customers. Long-term supply contracts would lock in prices, taking some of the ups and downs out of utility bills, they argue.

Most large industrial buyers of electricity - such as manufacturing plants and major retailers - use a similar approach when buying electricity. Such companies employ teams of consultants, who shop the wholesale energy market for the best deals. Variations of the idea have either been adopted or are under consideration in other states that deregulated.

"We think this is a good first step toward really getting all of the options out on the table," said William Fields, senior assistant people's counsel.

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