Maryland eyes move away from electricity deregulation

October 03, 2011|Jay Hancock

Last week, a decade after Maryland deregulated electricity by splitting the business of generating power from the business of delivering it to your house, worried regulators took a step backward.

They essentially ordered Baltimore Gas and Electric Co. and Potomac Electric Power Co. to seek proposals for building a big, new electricity plant — and billing the cost to ratepayers.

BGE, Pepco and other delivery companies were supposed to be through with generation plants. They were supposed to supply households, factories and stores with electricity bought from third parties on the unregulated wholesale market.

But the market has failed to deliver many of deregulation's promises. It's time for Maryland to take control of its energy fate and move in the opposite direction, if only a little.

"This is basically a step outside the market," Michael C. Powell, a Baltimore energy lawyer, said of the order by Maryland's Public Service Commission. "And it's trying to manage prices in a nonmarket fashion. But we won't know for years what the results of this would be if they carry through."

To prevent potential blackouts and reduce Maryland's reliance on imported electricity, the commission ordered utilities to consider proposals for a plant or plants fueled by natural gas and capable of delivering up to 1,500 megawatts of power.

That's enough to light more than a million houses. It's a far bigger enterprise than Gov. Martin O'Malley's proposed offshore wind farm. It would be the biggest addition to Maryland's generation fleet in two decades.

BGE, Pepco and the other utilities wouldn't actually own the plant or plants, as in days of old. But they would ensure construction by agreeing to buy power from the plants over a period of several years — roughly the way things worked under many decades of regulation.

The commission must give final approval to any deal. But Connecticut, New Jersey and other states with second thoughts about deregulation have taken similar steps. Maryland's Friday deadline for utilities to request generation proposals sharply raises the odds that something will happen here, as well.

Maryland burns more electricity than it makes, which means almost a third of its megawatts must be piped in from neighboring states. That's expensive. Imported juice incurs "congestion" charges to make it here over a crowded grid. The shortage of in-state generation means Maryland suppliers can charge a scarcity markup, too.

Deregulation was supposed to fix this. High prices were expected to lure developers to build electricity plants at their own risk and cost. But in Maryland, that never happened. Hardly any new generation has been added since the 1990s, even as the state's economy grew.

The charitable explanation is that temporary Maryland price caps and then the economic crisis kept companies from getting financing. Another explanation is that incumbent generators such as Constellation Energy are making so much money from the status quo that they'd be crazy to mess with it.

Whatever the reason, the Public Service Commission, which has been contemplating ratepayer-financed generation for years, finally decided to move.

This would be re-regulation lite — not nearly as drastic as seizing and slapping price controls on Calvert Cliffs, Brandon Shores and other generation plants owned by Constellation. (Deregulation gave Constellation control of those former BGE plants and the right to charge whatever the market would bear.)

But make no mistake. By indirectly charging utility customers for the cost of a new plant, implementation of the commission's proposal would mean that deregulation in Maryland has gone into reverse.

And it might cost you money. Capital costs for the plant would be built into any supply deal it signs with BGE, Pepco and other utilities. You, the electricity customer, would basically be paying off the plant's mortgage — of, say, $800 million — as well as buying its energy.

According to one, optimistic scenario, however, that could actually cut metro Baltimore's power costs. Locally generated megawatts are so scarce, according to this argument, that a new supply would lower prices across the market and more than compensate for the expense of building the plant.

"If there's a contract awarded, it's going to have a significant impact on [lowering] rates," claims Braith Kelly, senior vice president at Competitive Power Ventures, which proposes to build a $750 million, gas-fired plant in Charles County under this scenario. "There's going to have to be a lot of sharp pencils to make it work. It's going to have to work for ratepayers."

Constellation, for its part, is still analyzing last week's commission order. The company questions "whether additional natural gas generation in Maryland is needed" and "whether the PSC should take the extraordinary step of requiring it instead of letting supply and demand signals trigger new construction," said James L. Connaughton, a Constellation executive vice president.

But Constellation is hardly disinterested. Last week, Deutsche Bank analysts wrote that competition from a new, ratepayer-financed Maryland plant could "create pressure" not only on the stock of Constellation but on the stock of Chicago-based Exelon Corp., which has agreed to buy the Baltimore company.

So things are moving in a direction that could be advantageous for Maryland electricity consumers and detrimental to Constellation shareholders. That really would be a switch.

jay.hancock@baltsun.com

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