Dereck Davis Promotes Electricity Competition

At a time when many politicians are seeking to re-monopolize the electricity industry, Delegate Dereck Davis (D-25) is actually promoting savings from competition as a constituent service. And guess what? Both the Delegate and District 25 residents will benefit.

In July, we illustrated how consumers could save big bucks off their electric bill by switching their power generation purchases to cheaper suppliers. That blog post was the third most-popular post in our record-breaking summer of 2009. The problem is that re-regulation will end competition by once again forcing consumers to buy their electricity from monopolies. So while politicians can howl about cracking down on overpaid Constellation Energy CEO Mayo Shattuck, re-regulation would actually force many of their constituents to buy their power from his company. How is this good for us?

Dereck Davis gets it. Check out this flyer advertising an energy forum at Prince George's County Community College on October 20. Davis says that he will work to, "Ensure that the energy market in Maryland stays competitive in order to provide the best service and most affordable prices to consumers." When Delegate Davis shows his constituents that they can save double digits off their power bill while simultaneously switching to clean energy providers, a lot of them are going to thank him.

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MoCo and Prince George's State Legislators Urge Re-Regulation (Updated)

Eleven Senators and seventeen Delegates from Montgomery and Prince George's Counties signed a joint letter to the Maryland Public Service Commission calling for electricity re-regulation. Find out who signed below!

Here's the letter:



The identities of the non-signatories are even more interesting than the signatories. Five Senators and thirty-one Delegates did not sign:

Senator Rob Garagiola (D-15)
Senator Jennie Forehand (D-17)
Senator Nancy King (D-39)
Senator Nathaniel Exum (D-24)
Senate President Mike Miller (D-27)

Delegate Anne Kaiser (D-14)
Delegate Herman Taylor (D-14)
Delegate Kathleen Dumais (D-15)
Delegate Brian Feldman (D-15)
Delegate Craig Rice (D-15)
Delegate Bill Bronrott (D-16)
Delegate Bill Frick (D-16)
House Majority Leader Kumar Barve (D-17)
Delegate Jim Gilchrist (D-17)
Delegate Luiz Simmons (D-17)
Delegate Al Carr (D-18)
Delegate Roger Manno (D-19)
Delegate Sheila Hixson (D-20)
Delegate Tom Hucker (D-20)
Delegate Heather Mizeur (D-20)
Delegate Charles Barkley (D-39)
Delegate Kirill Reznik (D-39)
Delegate Tawanna Gaines (D-22)
Delegate Anne Healey (D-22)
Delegate Gerron Levi (D-23A)
Delegate Marvin Holmes (D-23B)
Delegate Carolyn Howard (D-24)
Delegate Michael Vaughn (D-24)
Delegate Aisha Braveboy (D-25)
Delegate Dereck Davis (D-25)
Delegate Melony Griffith (D-25)
Delegate Veronica Turner (D-26)
Delegate Jay Walker (D-26)
Delegate James Proctor (D-27A)
Delegate Sue Cullen (D-27B)
Delegate Jolene Ivey (D-47)

These legislators were wise to withhold their signatures right now. Any state politicians who really want to save their constituents money should first protect their right to save double-digits off their bill through consumer choice. Re-regulation would end those savings. If the electricity industry truly needs reform, that reform must protect our existing ability to save money first.

Update: Not a single member of the two committees with jurisdiction over re-regulation, Senate Finance and House Economic Matters, signed this letter. These are the legislators who actually heard testimony on the issue last year.

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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.

Thanks!

--Jim

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

Jim,

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.

Dereck

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.

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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.

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Big-Time Interest in Electricity Savings (Updated)

Our post on saving money on electric power is drawing a lot of attention. At the moment, 48% of all of our traffic consists of direct visits to that post. Some of the visitors are coming from the Facebook pages of Delegates Saqib Ali (D-39) and Kirill Reznik (D-39), both of whom are alerting their constituents to this opportunity. Thank you, Delegates!

Update: Gaithersburg City Council Member Ryan Spiegel has also linked to this post from Facebook and is quoted in an article on consumer choice in today's Town Courier.

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How to Save Money on Your Electric Bill Right Now

Over ninety percent of Marylanders can save money on their electric bills right now. You don’t need to write the Governor. You don’t need new legislation. You don’t need any help from politicians. You can do it NOW.

First, let’s understand how Maryland’s electricity market works. Under deregulation, utilities like Pepco and BGE do not generate their own electricity. They buy it from other suppliers. Sometimes those suppliers are subsidiaries of the same parent company (as is the case with BGE’s parent, Constellation Energy) and sometimes they are not. But you as a consumer have the right to choose your generating company and your utility will then distribute the power to your home or business. If you do not choose a generator, the utility will sell power to you from its suppliers under a Standard Order of Service (SOS) price. Ninety-seven percent of state residents do not exercise their right of choice and instead purchase SOS, but you don’t have to be one of them. The SOS price is not always the best price. Sometimes, you can find a better one.

The state’s Public Service Commission website allows you to find the power generators who sell in your area. In Pepco’s service territory, there are currently five suppliers you can choose: BTU Energy LLC, Clean Currents LLC, Horizon Power & Light LLC, Pepco Energy Services and Washington Gas Energy Services. BGE’s service territory has ten suppliers. All of the suppliers’ websites are listed and you can find out their offers.

How do you shop? First, find out your utility’s SOS price to compare, which is the average cost per kilowatt hour (kWh) of electricity generation and transmission. Utilities report this figure on their websites. Pepco’s SOS price to compare for residential customers is currently 12.51 cents per kWh. If you are receiving SOS – Pepco’s default supplier – this is the average price you are currently paying.


If you are a residential customer receiving BGE’s SOS, you are currently paying an annual average of 11.97 cents per kWh.


Now let’s check two of the alternative suppliers in Pepco’s service area. Let’s start with Clean Currents, a company based in Rockville which specializes in supplying wind power. Clean Currents is now offering both Pepco and BGE customers a rate of 11.2 cents per kWh for power that is 50% derived from wind energy and a rate of 11.7 cents per kWh for 100% wind power. That means Pepco customers can save 10.5% off their power bill and BGE customers can save 6.4% and simultaneously increase their use of wind power by switching to Clean Currents.


It gets better. You can save even more money with Washington Gas Energy Services (WGES). In Pepco’s service area, WGES offers electricity at a base rate of 10.8 cents per kWh. The rate goes up if you want higher percentages of wind power. That same base rate of 10.8 cents is available in the Baltimore area. That means Pepco customers can save 13.7% off their power bill and BGE customers can save 9.8% by switching to WGES.


These rates will not be in effect forever. But by looking for the best deal every year or two, you can save a bundle of money. Deregulation, which was intended to lower prices through competition, did not work when competitors were not present. But now they are in both the Washington and Baltimore areas. And now you know how to make this market work for you.

That’s the good news. The bad news is that some politicians in Annapolis are trying to take away your ability to save money. We’ll reveal how tomorrow.

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Three Ways to Hold Down Electricity Prices

The state’s electricity reregulation bill shows little potential for cutting electricity rates and may even backfire. But state legislators can do three things that will hold down electric bills over time.

1. Encourage upstart power suppliers.

One of the worst provisions of the reregulation bill provides for a “schedule of transition” away from the little customer choice that currently exists for residential and small commercial customers. That is a mistake. A nascent industry of renewable energy suppliers is finally starting in Maryland, spearheaded by wind energy broker Clean Currents of Rockville. Clean Currents allows small customers to enter into contracts to receive wind power from suppliers across the U.S. Local First Wheaton recently helped three local small businesses band together to buy this power at a discount. Just this month, 1.73 million BG&E customers gained access to Clean Currents for the first time. And Montgomery County has relied on wind energy from wholesalers for 10% of its power consumption since 2004. The state should be encouraging alternative renewable suppliers so that one day they can challenge Pepco and Constellation instead of crushing them through legislation.

2. Consider state land for renewable energy.

A year ago, Governor O’Malley issued a blanket ban against windmills on state land. It is galling for state politicians to criticize the private sector for not building new capacity when renewable energy has been outlawed on state property. The General Assembly should repeal O’Malley’s ban and allow the Public Service Commission (PSC) to consider renewable power applications on state land on a case-by-case basis.

3. Adopt legislation modeled on the Berliner bill statewide.

Montgomery County Council Member Roger Berliner has proposed a Home Energy Loan program to promote energy conservation. His bill would set up a fund to provide low-interest or even zero-interest loans to home owners for the purpose of financing home energy audits; caulking and weatherstripping; insulation; purchases of energy-efficient boilers, furnaces and AC units; programmable thermostats; whole-house air sealing; and other improvements.

Conservation is a no-lose option because it saves money for consumers, reduces demand for energy and cuts greenhouse gas emissions. And the genius of the Berliner bill is that it promotes conservation while enhancing property values and encouraging the creation of green jobs all at the same time.

While the Berliner bill relies on loans, the state does not have to choose that particular enabling mechanism. The General Assembly could instead rely on subsidies, tax deductions, tax credits or some combination thereof. But however it is accomplished, this approach could reduce aggregate demand for electric power (and home heating fuel) and lead to smaller energy bills for participating homeowners.

So if state politicians really want to hold down electric rates, they should drop command-and-control economics and pass a bill with each of the above three components. That would provide a path to real relief for Marylanders.

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Will Reregulation Work?

One of the biggest issues before the General Assembly at the moment is an effort to “re-regulate” electricity provided by new power plants. The bill, as amended, would grant the Public Service Commission the authority to force utilities to build new power plants and end retail competition for electricity. The bill’s supporters claim it will lead to lower electricity rates. Will it?

For the majority of the twentieth century, electric power was provided by regulated monopolies. In most local areas, one company generated the power, transmitted it to substations and distributed it directly to residential and industrial customers. State and local regulatory bodies decided on the rates that were charged to consumers. In 1996, the Federal Energy Regulatory Commission opened the door to electric power competition through its Order No. 888, which required owners of transmission lines to allow non-discriminatory access to other power providers. That kicked off a movement by 18 states plus the District of Columbia to set up competitive markets through which electric power could be bought or sold.

In Maryland, a 1999 bill required Pepco and Baltimore Gas & Electric (BG&E) to divest their in-state plants, freeze rates through 2006 and ultimately allow their customers to pick their energy suppliers. Pepco sold most of its plants to new merchant generator Mirant while BG&E formed a new parent company (Constellation) and transferred its plants to a different subsidiary. True competition never materialized in Maryland and electricity fuel input prices went up, so BG&E and Pepco sought colossal rate increases in 2006. Many politicians now describe deregulation as a failure and the issue has been a political football ever since.

SB 844 seeks to remedy the problem by giving the state’s Public Service Commission (PSC) the ability to force power suppliers to build new generating plants and directly regulate the rates those new plants can charge consumers. Will this bill lower electric prices over time? Probably not, for the following reasons:

1. Regulation does not automatically lower rates.

We obtained monthly year-on-year U.S. electricity retail price change data from the Bureau of Labor Statistics from 1953 through February 2009. We present the data in the graph below.


The biggest electricity price spikes since 1953 have occurred from December, 1972 through September, 1975 (when prices jumped by 42.5%) and December, 1978 through August, 1982 (when prices jumped by 65.2%). Those were periods in which almost all electric power in the U.S. was subject to regulation. The reason for electric power price increases was price hikes for fuel inputs, especially fossil fuels. Under cost-of-service regulations, the traditional method of price-setting used by regulating entities, utilities are allowed to charge rates that reflect their price of inputs along with a modest profit. Regulation may allow price increases to be spread out over time, but it does not shield consumers from input price hikes over the long term.

The data shows one additional fact. The greatest prolonged drops in retail electricity prices since 1953 occurred from July, 1997 through January, 1999 (down 13.0%) and July, 2001 through November, 2002 (down 11.3%). Both of those declines occurred during a time when many states were deregulating.

2. The bill does not address the root cause of rising electricity prices.

Below we illustrate the monthly levels of U.S. retail electricity prices and wholesale prices for crude petroleum, natural gas and coal from 1986 on from the Bureau of Labor Statistics. All price levels are indexes using 1984 as a base level of 100.


We ran a multiple regression predicting retail electricity prices on the basis of the above three fuel inputs. We found that 77% of the variation in retail electricity prices since 1986 was explained by variation in wholesale prices of crude petroleum, natural gas and coal. So for the most part, rising electric bills are a result of rising commodity prices.

The role of natural gas is especially crucial. Since 1998, 96% of all net generation capacity added in the U.S. has come from natural gas-fired plants. The reason for that is three-fold. First, natural gas is relatively abundant in North America and burns cleaner than coal, making it the fuel of choice for new plants in the 1990s and the early 2000s. Second, gas plants can be built quickly and relatively cheaply compared to new coal and nuclear facilities. For example, merchant generator Calpine used one plant design to build dozens of new facilities across the country. Third, gas plants can be quickly turned on and shut off, making them ideal for use during power spikes (like hot summer days) and in spot markets. But the sudden increase in demand for natural gas could not be met by existing exploration and the result was soaring, and volatile, natural gas prices. This pushed up retail electricity rates. Maryland’s reregulation bill does nothing about this.

3. The bill could have unintended consequences.

Astute utility managers hedge their exposure to commodity prices by diversifying their supplies among many fuel inputs, many suppliers and many contract intervals. But the reregulation bill could conceivably impede these strategies by emphasizing new construction over imports. Suppose PSC orders a Maryland generator to build a new natural gas plant and later the price of natural gas spikes. Under cost-of-service regulations (which are explicitly called for in the bill’s amendment), the plant owner would be entitled to call upon ratepayers to compensate it for the higher costs. That would mean that the bill might actually cause electric rates to increase.

4. Any positive impact will only affect a tiny share of the power market.

As of 2006, Maryland had 12,500 megawatts (MW) of generating capacity. (One MW is enough to power 600-1,000 single-family homes). The largest power plant in the state is Mirant’s Chalk Point coal plant, a 2,429-MW facility that produces about 19% of the state’s capacity. Coal plants produce a lot of energy but it is unlikely that PSC will permit any more of them. Gas-fired plants generate anywhere from a few dozen to a couple hundred megawatts each. So suppose PSC ordered a generator to build a 300-MW gas plant, a rather large facility for that fuel type. That plant would only account for 2% of the state’s capacity. Even if its rates were kept artificially low, they would have almost no impact on the rest of the market. Add to that the fact that new generating plants take many years to permit and build and – at its best – the reregulation bill offers almost no hope of any meaningful price relief.

Overall, the bill’s command-and-control approach to the dysfunction of the electricity market (a market that was created by the General Assembly) shows little promise of decreasing rates. That is why a giant coalition of industrial customers opposes it. But there are real steps the legislature can take to ease electricity rates over time. We will recommend three options in our next post on the issue.

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Electric Schemes, Nuke Dreams

On Thursday, the Maryland Senate endangered the Governor’s settlement with Constellation Energy by voting to amend it. Here’s why the Governor’s deal is worth passing.

When the administration and Constellation, parent company of electric utility BGE, settled their lawsuits against each other, the deal had several components. First, BGE’s residential customers would receive $187 million in one-time rebates, or $170 each. Second, individual Constellation investors would be permitted to own up to 20% of the company each. Third, BGE customers would see limits on electricity distribution charges in the future. Fourth, BGE agreed to add two independent seats to its board. Fifth, the deal cut the liability faced by ratepayers for eventually decommissioning the Calvert Cliffs nuclear plant from $5.2 billion (which Constellation is permitted to collect by the 1999 deregulation law) to $3.7 billion (the current estimated shutdown cost). This will save Marylanders $1.5 billion. There are additional smaller components but these are the most important parts of the deal.

The Governor’s settlement was contingent on passage by the legislature. Constellation’s position was that the deal had to pass without changes. But the Senate thought better. On a 27-18 vote, the Senate added an amendment to regulate the sale of electricity from any new plants built in the state, essentially a limited rollback of deregulation. Senate President Mike Miller and the Governor claim that this vote endangers the deal because it changes its terms. Now it’s hard to blame the Senators who voted for the amendment. Deregulation has been a disaster for Maryland ratepayers and has created shocking wealth for the power companies and their CEOs. But the best reason for sticking with the Governor’s deal is its least-mentioned and most-important provision: the $1.5 billion reduction in the Calvert Cliffs decommissioning liability.

As someone who works for a union that gets carpenters and millwrights hired onto nuke jobs, I can tell you that these jobs are really, really expensive. All trades workers that set foot into a nuke plant must pass background checks and drug tests. And those checks and tests are repeated over and over. All of the workers have completed or are enrolled in four-year apprenticeship programs and numerous journey upgrade and safety courses. (We actually own a gas turbine at our international training center that our instructors practice dismantling and assembling.) Many workers also need to get haz-mat (hazardous materials) certifications. Often, there’s not enough qualified workers in the local area so out-of-state people are flown in. Those guys get per diems and sometimes even signing, retention and head-hunting bonuses. Everybody gets top scale and massive amounts of overtime. Even the laborers are rolling in dough. And part of the decommissioning will include clean-up and storage of radioactive waste. You don’t want to know how much that costs. All of this will go on for years at a decommissioning site.

I can’t tell you how much my guys like this kind of work. These jobs are an apprentice’s fancy, a journeyman’s love and a local union business manager’s dream. The last remnant of America’s working-class aristocracy may be the tens of thousands of “boomers” – traveling super-skilled electricians, pipefitters, boilermakers and millwrights – who fan out across the country to work nuke shutdowns and turnarounds. The boomers can make six-digit annual incomes and set themselves up for fat pension checks and lakeside retirement cabins.

So Constellation says the Calvert Cliffs decommissioning will cost $3.7 billion? Horsepuckey. It will cost four billion, five billion… aw, who cares how many billions as long as my members get the work!! (If you were wondering what “bread-and-butter unionism” is, that statement is a good example.)

But enough about my nuke-worshipping hardhats. My point is that if you are a Constellation/BGE customer, you do not want to be on the hook for all of these costs. Let Constellation’s shareholders and/or its merchant generation division pay some of them. The decommissioning liability reduction is a far more valuable asset to BGE ratepayers than the rebate and it is worth protecting.

So my advice to the General Assembly is to approve the Governor’s deal as-is and come back to re-regulate the power industry next year. That way the ratepayers will get their rebates, the residents will get the protections of regulation and BGE customers won’t have to pay $1.5 billion in extra billings. And what about my boomers? We’re all going to strap on our toolbelts and head down to Calvert Cliffs for some of that overtime!

The author is the Assistant to the General President of the United Brotherhood of Carpenters. He wishes he was as well-paid as the boomers.

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