Wednesday, July 22, 2009

Dereck Davis vs. Jim Rosapepe on Electricity Reregulation

In an email exchange widely circulated in Annapolis, Senator Jim Rosapepe (D-21) and Delegate Dereck Davis (D-25) hold a spirited duel on the issue of electricity reregulation. Davis is the Chair of the House Economic Matters Committee, which has jurisdiction over electric utilities, so he will be a big player in writing any electricity legislation. Come behind the closed doors of Annapolis and read on!

The duel began when Rosapepe sent out an email to many state legislators recruiting them to sign a letter to the Chair of the Public Services Commission (PSC) in support of reregulation.

Date: Tue, 21 Jul 2009 09:17:21 -0400
Subject: letter to PSC on Pepco and electric rates
From: Jim Rosapepe
To: State Legislators

I'm writing to invite you to join Senators Currie, Frosh, Peters, Madaleno, Muse, Kramer, Pinsky, Raskin, Harringon, Lennett, and me in supporting Governor O'Malley's efforts to reregulate electric rates and explaining how his efforts in the Constellation/EDF case will benefit Pepco customers, who we represent, as well.

Please call me on my cell at [number withheld] if you have questions, or let my staff know if you'd like to sign on.

Please let us know by 5:00pm on Wednesday.



Dear Mr. Chairman:

We write to express our strong support for your efforts to protect Maryland consumers by reversing the dramatic failures of electric deregulation. In particular, we appreciate your work advising the legislature when the Senate passed the Governor's reregulation this year. This legislation advances new power plant construction and long term energy planning. We look forward to working with the Governor to pass it through both houses of the General Assembly in 2010.

Meantime, since our ratepayers are suffering from excessive rates for electricity produced by existing plants, we applaud your decision to review the Constellation/EDF transaction.

As you know, Governor O'Malley has proposed conditioning approval of this transaction on inclusion of several key protective measures for consumers, including lower rates for customers and launching the return to regulated rates for the future.

Understandably, BGE customers are enthusiastically backing the Governor's strong stance on behalf of ratepayers in this case. We write as elected representatives of Pepco customers to say that moving the Governor's agenda here is very important to us and our constituents as well. Here’s why:

First, the CEG/EDF case and the reregulation legislation we hope to pass in 2010 are aspects of the same battle for consumer rights and a return to fairness in the electric markets. Since Constellation was the major local proponent of deregulation in 1999 and remains its major defender to this day, prying Constellation away from this historic failure will create momentum for reform across the state.

Second, as your consultants demonstrated last fall, reregulation would save ratepayers billions of dollars, even if done in arm's length transactions. They showed how Pepco customers could save $1.6 billion. Deregulation defenders like Constellation have claimed that reregulating rates of existing power would be "too complicated." By restoring healthy regulation and oversight in the Constellation/EDF case, as the Governor has proposed, the PSC would demonstrate the feasibility and benefits of this approach, providing just the model we need for reducing Pepco’s inflated rates as well.

As you move forward in the Constellation/EDF case, we urge you to look for similar opportunities in the Pepco service area to reduce our constituents' electric bills by reregulating their rates. We recognize that such an opportunity may not appear immediately. But Pepco customers, like BGE and all other Maryland ratepayers, have suffered mightily from excessive electric rates. No opportunity to protect our people should be missed.

We thank you for your attention and urge you to continue in your important work.

Senators Currie, Frosh, Peters, Madaleno, Muse, Kramer, Pinsky, Raskin, Harringon, Lennett, & Rosapepe
Dereck Davis, who represents Prince George's County as does Rosapepe, wrote this response:

From: Dereck Davis
Sent: Tuesday, July 21, 2009 11:26 PM
To: Jim Rosapepe, State Legislators
Subject: RE: letter to PSC on Pepco and electric rates


Thank you for the invitation to sign the letter below "supporting Governor O'Malley's efforts to reregulate electric rates". I appreciate your diligence and commitment to this most important issue facing our state. Respectfully, I have to decline this invitation on practical as well as philosophical grounds.

First of all, I strenuously disagree with your implied assertion that the enactment of SB 844 would lead to lower electric rates. Chairman Nazarian met with Delegate Brian McHale and myself on February 27th, immediately following the House floor session, to discuss this matter. During the course of this meeting, he very pointedly stated that even if we enacted this legislation "it would take years, if not decades, to fully reregulate" our electricity markets. He further stated that he could not guarantee that our constituents would realize lower rates in the near or the long term future. This admission was especially alarming to me because I had previously heard that it would cost approximately $16-20 billion to fully reregulate. As I know you are aware, utilities would be granted full cost recovery from the ratepayers for these new generation plants. That is a mighty big gamble for no guarantee of rate relief.

Secondly, I am confused by your statement that "Governor O'Malley has proposed conditioning approval of this transaction...". I may be misinformed but I thought that under the Public Utility Companies Article, this decision falls within the purview of the Maryland Public Service Commission. This may seem like a minor point to some but a significant part of the 2006 debate about electric rates centered on the lack of separation between the PSC and the Ehrlich Administration. Many Democrats, including both presiding officers, lamented the fact that there appeared to be a lack of independence being exhibited by an independent body. If what you are asserting is true, then isn't history just repeating itself? Shouldn't we allow the well-qualified, professional regulators to do their jobs without political interference? I am not suggesting we abdicate our responsibilities but by the same token, we should not over-extend our reach either.

Thirdly, I am extremely concerned about Maryland's business reputation. The General Assembly enacted SB 1013-08 after extended discussion among representatives of the governor, legislative leaders, PSC, and Constellation Energy Group(CEG). These discussions yielded numerous benefits for ratepayers within the Baltimore Gas & Electric service territory that totaled several hundred million dollars, including $18.6 million annually until 2016 for the decommissioning of Calvert Cliffs 1 and 2, a one time $187 million credit against residential customer electric bills, and $520 million from PSC Order 75757. It was understood by all parties that this would close the door on the 1999 matter and the state would move forward. It appears that just one year later, the spirit of that agreement is being violated.

In addition to the spirit of that agreement being violated, I am also taken aback by the methods we are employing relating to the CEG/EDF partnership. While I applaud the state's unrelenting commitment to affordable electricity, the end does not justify the means. Our methods and constantly changing energy policies are having a chilling effect on our utilities' bond ratings.

One question I have that no one has answered is what happens if this transaction doesn't go through? The proposed third nuclear reactor at Calvert Cliffs is a major part of the state's future energy plans. If EDF pulls out of the deal or if the PSC denies the deal because certain concessions were not made, Constellation is back in a very tenuous financial position. Not only will this major component of our future energy plan be in jeopardy, a major employer in the state might go bankrupt. Who's going to accept responsibility for all those lost jobs and tax revenue?

Finally, I am interested in knowing the basis of your often stated opinion that Constellation "was the major local proponent of deregulation in 1999." With all due respect colleague, you were not a member of the General Assembly when this discussion took place. You resigned from the House of Delegates effective December 31, 1997, to become Ambassador to Romania. During your ambassadorship, I was a member of the House committee with jurisdiction (Environmental Matters), I served on the legislative taskforce that studied the issue, and I participated in many of the discussions involving the various details. Trust me when I tell you that the utilities, including BG&E, were opposed to changing the current system. They talked a brave game about not being afraid of competition but the fact of the matter is who would want to change a system where they were guaranteed cost recovery for their expenses as well as a guaranteed rate of return? The only entity that was really pushing this policy change was a multi-national corporation based in Houston, Texas.

The House Economic Matters Committee is diligently reviewing all the relevant issues and is committed to finding the best course of action. If the facts support reregulating, then we will lead the charge in that direction. If the facts do not support it, no amount of political pressure will lead us to implement a wrong decision.

And Rosapepe responded with this:

From: Jim Rosapepe
Date: Wed, Jul 22, 2009 at 2:27 PM
Subject: PSC letter -- response to Chairman Davis' message
To: Dereck Davis
cc: State Legislators

Dereck --

Thanks so much for your long and thoughtful letter. Very impressive work -- and at 11:26 at night!

I look forward to discussing these issues in detail with you, as we did early in the last session. It's terrific that the committee is taking up the issue in preparation for the next session.

For now, I'll just briefly respond to each of your points and questions.

First, I agree there are no guarantees in this life -- or in reregulation of electric rates. But Maryland tested regulation for decades and it produced reliable electricity and reasonable rates. Proponents of deregulation promised lower rates and more supply. Instead, in ten years, rates have gone up more than 70% and no new major generation has been built in the state. The governor believes that increasing supply with regulation will hold down rates in the long run, based on the simple economics of supply and demand. I agree with him.

Second, I agree with you that the PSC has the regulatory responsibility to approve or disapprove the EDF investment. But, as you know, the governor has provided strong leadership for consumers by making the state an official "intervenor" in the case and has proposed to Constellation a generous compromise to assure that the benefits of potential PSC approval are shared with struggling ratepayers, not just with Constellation CEO Mayo Shattuck, who is in line for an $87 million payout. The governor's proposal is available on the web and has been widely reported in the press.

Third, I share your concern about Maryland's business reputation. Deregulation made our state less competitive for all kinds of businesses, as well as residential consumers. Lower, more stable energy costs are always a competitive advantage for a business and for a state. The governor has proposed a business-like approach to Constellation's request for the PSC to allow it to be bailed out by EDF. As you know, the management of Constellation almost bankrupted the company, as so many Wall Street banks did, by taking bad financial risks in pursuit of excessive executive bonuses. Consumers have paid the price in higher electric rates. The governor is just seeking a fair deal for our constituents.

Fourth, if EDF decides to withdraw their offer, other investors would no doubt come behind them. As a result of President Obama's efforts, the financial markets have materially improved since last September. But, even at that time, when Constellation faced ratings downgrades because of mismanagement, it had TWO offers -- one from Warren Buffett and one from a consortium of EDF, KKR, and TPG.

Fifth, I agree that I was in Romania, not in Annapolis, when deregulation was passed and that ENRON was the major out-of-state proponent of deregulation. The basis of the letter's statement that Constellation was a supporter of deregulation in 1999 is the recollections of others who were there then, including signers of the letter. We can agree that memories of people of good will can differ. Nonetheless, I'm sure we can also agree that Constellation is today the state's biggest and most aggressive protector of deregulation.

Thanks for your serious attention to this issue and I look forward to working with you on it.

-- Jim
In reading the above exchange, we are struck by the frequency with which Rosapepe targets Constellation. The energy giant is certainly unpopular and is therefore an inviting political punching bag. That fact may count far more with the politicians than Dereck Davis's concerns over financial issues and business reputation. We are not as cynical as Blair Lee on the political positioning with regards to Constellation, but this exchange makes us wonder.

If the politicians really want to save us money, they should send our analysis of how we can save double digits off our power generation bill to their constituents right now. That blog post is one of the most popular items we have ever published.

Individual consumer action may not get politicians re-elected, but it can save Marylanders lots of money. Everyone in Annapolis should be asking themselves which of the two is more important.