Wednesday, July 08, 2009

How Re-Regulation Will Cost You Money

Yesterday, we revealed how Pepco customers can save up to 13.7% off their power bills by switching to a new power supplier. BGE customers can save up to 9.8% off their bills by doing the same thing. But “re-regulation” will block your ability to save yourself money. Why?

In the old days, utilities were vertically integrated companies. They generated power, transmitted it to substations and distributed it to customers. But they had to answer to government regulators, who set their prices. Those prices had to allow the utilities to recover their costs of servicing customers. Otherwise, they would be unable to remain in business. The prices also had to generate a reasonable return on investment. After all, if stockholders could not get steady dividends and occasional capital gains by buying utility stocks, no one would buy them and none of those of power plants or utility lines would have been built. Because of these characteristics, the old system did nothing to protect consumers from the gigantic price spikes that occurred in 1972-1975 and 1978-1982.

Deregulation changed all that. In Maryland, Pepco and BGE were forced to sell off their power plants so they could purchase electricity from competing suppliers. (BGE wound up selling its plants to another member of its corporate family.) Competition was supposed to keep prices low. But the plan did not work immediately for two reasons. First, the alternative suppliers were slow to show up. Second, retail prices were capped from the time the deregulation law passed in 1999 through 2006. Deregulation’s architects thought enough power suppliers would enter the market by 2006 that rates could be allowed to float and competition would keep prices down. Instead, BGE asked for a 72% rate hike to make up for seven years with no price increase. Political hysteria ensued.

Fast forward to the winter of 2008-2009. Competition has arrived. As we stated yesterday, Pepco customers can pick from five electricity suppliers and BGE customers can pick from ten. But few people took advantage of those opportunities and rising utility bills put the issue of “re-regulation” back on the table. The Senate passed a bill that would have given the state’s Public Service Commission the right to order utilities to build new power plants and regulate the rates they charge. Never mind the fact that it would take decades to build all of these new plants and no one knows exactly how many billions of dollars they would cost. And never mind the fact that business customers, who spend massive amounts on electricity, opposed the bill and were organizing employee cooperatives to take advantage of competition. Some in the General Assembly were determined to save us from the deregulation regime that the General Assembly, of course, created. But the House of Delegates’ Economic Matters Committee stopped the measure on a 21-2 vote. As Delegate Brian Feldman (D-15) said, “There's a risk, if we screw this up, of unintended consequences.”

Here is the unintended consequence. The “re-regulation bill,” as amended, contained this language:

The commission shall develop and implement a plan for residential and small commercial customers to transition from a program of customer choice of electricity supply and electricity supply services established under subtitle 5 of this title.
So remember how you can switch suppliers and save double digits off your power bill? “Re-regulation” will put the brakes on that. Why?

Remember how the old regulated system works. Even though regulators set electricity rates, utilities are allowed to recover their costs from customers and realize a return on investment. So if the “re-regulation” bill passes and the Public Service Commission orders Pepco or BGE to build a new plant, they will be entitled to pass on the cost of building, operating and maintaining that plant to you. Plus, they will be allowed to earn a profit. Under today’s system, if Pepco or BGE raised the price of their Standard Offer Service, which is their default price for electricity, you could switch to another power supplier to save money. If the state forced either of them to build a new power plant and their customers deserted them to avoid paying the construction charges, the utilities would be unable to pay their costs and earn a profit on the plant. So to keep the companies whole, the state would have to limit competition and force you to pay for all of this. The problem would be compounded if the plant owner bets wrong, builds a plant that runs on a fuel that later soars in price and seeks to pass on those costs to now-captive customers like you. Is that a risk you want to bear?

Think about it this way. Today, you have the ability to shop around and save money on your power bill right now. Pepco customers can save up to 13.7% by purchasing their power from Washington Gas Energy Services. Ask any politician who supports “re-regulation” if any law they can pass will save you 13.7% right now. And then ask them exactly when any law they can pass will save you 13.7%. See how they answer you. And then think about whether “re-regulation” is truly in your interest.