October 24, 2010|By Jay Hancock
A few years ago, grid administrators outside Philadelphia changed the rules for selling wholesale electricity in such a way that Maryland consumers will end up paying an extra $5 billion or so for their kilowatts from 2007 to 2014. More than half of that — almost $3 billion — is coming from customers of Baltimore Gas & Electric.
If a $5 billion tax had been enacted, there would have been a loud public debate. But unlike a proposed tax, what we can call the Maryland electricity surcharge was never discussed or approved by elected officials. Instead, it was set up behind closed doors by technocrats heavily influenced by the companies that generate and sell electricity.
If people knew where the money goes, a debate might be acrimonious. At least taxes pay for fire departments, homeland defense and other items that benefit the public.
The $5 billion Maryland electricity surcharge, on the other hand, is extra profit for Constellation Energy, Mirant Corp. and other generation companies that operate in this state and nearby.
The money was supposed to lure those companies and others to build generation plants, thus easing electricity shortages.
But the generators haven't been built. At least not in Maryland. The theory has failed here.
Meanwhile, the surcharge is costing the typical BGE household an average of $175 per year, according to a calculation I made with the help of the Maryland Office of People's Counsel, which represents consumers in utility matters. That'll go up to $240 from mid-2013 to mid-2014. (I'll discuss this number and others mentioned in this column — they're derived from PJM, regulators and independent consultants — on my blog: baltimoresun.com/hancockblog.)
This surcharge is buried in your monthly electricity bill. But it doesn't pay for electricity. It doesn't pay for poles and wires or meter readers. It's mostly pure profit for generation companies — on top of the profits they already make for selling you electricity, industry analysts say.
"It is a joke," says Robert McCullough, an economist and energy consultant hired by the Illinois attorney general to analyze similar electricity charges in that state. "We can say without any question that it is completely outlandish."
The Maryland electricity surcharge, the subject of Public Service Commission hearings a few days ago, is another way in which electricity deregulation has hammered consumers and businesses.
In 2006, BGE households got hit with the notorious 72 percent price increase. The next year, the generation surcharge, approved by federal regulators to achieve what the industry likes to call "revenue adequacy," raised BGE prices even higher. More recently, the surcharge has kept electricity costs from falling as far as those for other kinds of energy.
"I don't think it's a good deal for consumers," says James F. Wilson, an energy economist who has analyzed the surcharge in detail. "I can't think of any other industry where people fret about 'revenue adequacy.' To me that sounds like money."
The surcharge was created through PJM Interconnection, a nonprofit organization in Valley Forge, Pa., which manages the grid in Maryland and a dozen other states. Working closely with energy companies, PJM sets the rules for the wholesale market in which BGE and other utilities buy electricity to resell to end users.
Starting in 2007, PJM radically changed how utilities pay to reserve time at generation plants to ensure that they'll have access to megawatts. (Think of a personal seat license at M&T Bank Stadium. You pay once to claim the seat and again to use it.)
Instead of locking up generation capacity several months in advance, utilities had to bid for it three years ahead of time. New auction rules also ensured that generation capacity would become extra expensive in areas that import large amounts of electricity from other states. Few regions rank higher in megawatt imports than BGE territory.
People were shocked when the first auction results became known in 2007. Capacity prices spiked tenfold.
Don't worry, said PJM. This is the way it should work. The sticker shock would "send pricing signals that will attract investment in new capacity resources where they are most needed," PJM executive Andrew Ott said at the time. And that would make capacity prices and generation prices go down.
But it didn't happen. There have been no major generation plants built or started in Maryland. The recent collapse of plans by Constellation Energy and EDF Group to build a third reactor at Calvert Cliffs underscores the failure.
While high capacity prices have induced some users to cut electricity use (that's capacity, too, as far as the grid is concerned), central Maryland still imports a huge amount of electricity. And in the capacity auction for 2013 and 2014, prices to be paid by consumers rose to near-record highs.
