Blame government, not BGE, for turning off the AC

Maryland politicians don't trust the market to price electricity what it actually costs

August 08, 2011|By William Yeatman

Ratepayers are steamed at Baltimore Gas & Electric Co. for turning off air conditioners in thousands of homes on July 22, the hottest day in 75 years. Their outrage, however, is misdirected. Blame for this indoor heat wave lies with the government in Annapolis, not with a utility in Baltimore. BGE customers were left without climate control in 110-degree heat because politicians don't trust their constituents with the thermostat.

Hot days are a threat to reliable electricity service because surges in the use of energy-intensive air conditioners can overwhelm the grid. In order to avoid power outages caused by overloads in electricity consumption, Maryland lawmakers have enacted policies to "manage" demand. Specifically, in 2008, Gov. Martin O'Malley signed a law that established targets for utilities to reduce demand during peak periods. BGE achieves these goals primarily with its PeakRewards program, by which the utility pays customers for the right to centrally plan their central air.

On July 22, temperatures soared, and the grid was vulnerable to rolling blackouts. BGE headed off this possibility by powering down air conditioners in thousands of homes. As there were no service interruptions, the PeakRewards program "worked." The problem is that the "success" of the program came at the expense of thousands of Marylanders left without air-conditioning on the hottest day of the year. For heat-sensitive populations (the elderly in particular), the absence of climate control was life-threatening.

There is a better way. Maryland could most efficiently, affordably and safely prevent blackouts on hot days merely by pricing electricity what it costs. Since the Progressive Era at the turn of the 20th century, state regulators have set the price of electricity at a flat rate. During the summer, BGE customers pay 9.4 cents a kilowatt hour for electricity, night and day, whether it is 85 degrees outside or 110 degrees. Of course, demand is much greater at 6 p.m. on a sultry day than it is at 6 a.m. on a mild day.

If the price of electricity were a function of market forces, rather than central planning, there would be no need for BGE to "manage" demand by remotely turning off air conditioners. Electricity consumers would manage demand on their own accord, in response to a price signal. When demand increased, the price of electricity would increase, too, and ratepayers would moderate consumption. Peak demand would flatten naturally. The grid would no longer be threatened with blackouts due to consumption overloads on hot days.

In addition to improving reliability, there are other benefits to lifting price controls for electricity. Decreased peak demand would diminish the need for new power plants and transmission towers. Most importantly, electricity prices subject to market forces would empower ratepayers to save money on their own accord. Marylanders could turn up the thermostat a notch on hot afternoons, or do their laundry at night, or take any number of measures to reduce consumption when electricity is priced high, and increase consumption when it is priced low. A functioning price signal would spur the development and adoption of "smart" efficiency-enhancing technologies. Electricity consumers would have total control of their utility bills.

Unfortunately, Maryland public officials don't believe that ratepayers are fit to manage their electricity use. In June 2010, the Public Service Commission denied BGE's request to implement "time of use" pricing, whereby ratepayers equipped with "smart" meters could monitor the price of electricity in real time, and thus inform their consumption patterns. It was rejected because BGE failed to present a "concrete, detailed customer education plan." As if Marylanders need to be educated how to read a price!

There is a self-serving reason why public officials are reluctant to liberate the electricity market. Controlling the cost of a fundamental commodity like electricity is an enormous privilege, and rare is the politician who volunteers his or her power. Instead of allowing market forces to dictate electricity consumption, politicians "manage" demand. That way, they can maintain their grip on the utility industry.

Only July 22, when BGE left thousands of its customers sweltering without climate control for up to 10 hours in record-breaking heat, the utility was following orders from Maryland lawmakers. This is only the latest evidence that providing electricity is far too important to be left to the devices of elected officials.

William Yeatman is an energy policy analyst at the Competitive Enterprise Institute. His email is wyeatman@cei.org.

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