Maryland Loses Control of its Energy Future
“This,” declares state Sen. Leo E. Green, standing before the Senate Finance Committee and a capacity audience on the afternoon of March 21. “This is the nuclear approach.”
Before he explains “the nuclear approach,” the stately Democratic senator from Prince George’s County, a former mayor of Bowie, turns his head and glares at the passel of power company and utility executives sitting in the audience. Green is nearly foaming at the mouth—literally: white flecks of spittle form at the corners of his grimace—as he mentions the millions of dollars that executives of Constellation Energy Group, parent company of Baltimore Gas and Electric Co., reportedly made from the recent exercise of their stock options. Industry reports show that Constellation CEO Mayo Shattuck III and three other top executives exercised tens of millions of dollars in stock options and then, on Dec. 21, 2005—just two months before a 72 percent (BGE) electric rate increase was announced— sold Constellation stock worth over $100 million.
Returning to his legislation, Senate Bill 972, Green announces that his nuclear bomb proposes the reregulation of utilities like BGE as the only long-term solution to the rate-hike crisis that has engulfed media and public discourse in Maryland. Not only would his measure overturn deregulation and return rate-setting power to the Maryland Public Service Commission, it would allow electric companies to buy or build power generation facilities and prohibit the passing on to ratepayers “the cost of reacquiring generation assets that the companies sold or transferred to affiliates.” In other words, BGE would somehow grab back the coal and nuclear plants turned over to Constellation, under the 1999 state deregulation law, without any costs to the ratepayers. If Green has his way, deregulation would be blown up, and the good old days of regulated, cost-based electricity from BGE-owned power plants would be back.
The senator has some surprising allies in his bid for reregulation. Maryland Attorney General J. Joseph Curran Jr. provided Green with a written opinion that taking back the power plants without compensation by ratepayers “is not unconstitutional.” While not going that far, Patricia A. Smith, the governor-appointed director of the Maryland Office of People’s Counsel, has called for an investigation that includes evaluation of “utility acquisition of existing plants” and “a state power authority.” Baltimore Sun business columnist Jay Hancock has repeatedly called for reregulation. “Desperate times call for desperate measures,” Hancock wrote in his March 8 column; on March 12 he wrote, “Maybe BGE and its long-lost plants could be reunited. What the General Assembly once put asunder, the General Assembly can try to rejoin.”
But with only two co-sponsors, SB 972 seems to have no legs. Apparently, even as the legislature wrangles with BGE and Constellation over the rate hike, Gov. Robert Ehrlich and the legislative leadership so far remain committed to deregulation. In a late-March interview with City Paper, Green admits that while he believed in the long-run public regulation must be the way to go, “in the short term, reregulation doesn’t have a chance in this [legislative] committee.”
With that acknowledgement, the underlying meaning of the state’s electric rate shock comes into full view: Maryland has lost control over its energy future. Whatever deal may finally be struck to cushion the rate increase, whatever the reconfiguration of the Public Service Commission, whatever the outcome of the proposed merger between Constellation and Florida Power and Light, control over the state’s electric supply and its price has been lost, ceded to unstable global energy markets and a now-unregulated local monopoly.
It wasn’t supposed to turn out this way.
During the March 21 Senate Finance Committee hearing, the debate revolved around arcane arguments over regulation vs. deregulation, fixed-price “standard offer of service” and spot markets, opt-in aggregation vs. opt-out aggregation. Such debate makes even the most attentive mind quickly grow bleary. Strictly speaking, Maryland residents and businesses don’t really care about these formal mechanisms; they care that their electric supply is predictably reliable and affordable and, for many, environmentally friendly.
Indeed, the utilities themselves once saw government regulation, first established in Maryland in 1910, as the savior of their industry. The official 1950 history of Baltimore Gas and Electric celebrated an end to “the days of competition” and “the creation of the Maryland Public Service Commission...of a permanent and quasi-judicial control...and a reasonable rate of return.” For the next half-century, BGE, like all other utilities, charged gas and electric rates based on production and distribution costs, plus a reasonable rate of return as determined by the state Public Service Commission. While this meant that utilities were viewed as investment laggards in the go-go stock market, they were stocks of Gibraltar during economic downtimes because their costs and their earnings were guaranteed.
All that changed when Enron and the theology of competition and free markets for electricity came to town in 1998-’99. By separating electric power production from distribution, and the creation of a free trading market for kilowatts, the utility and electric industry promised lower prices for customers due to competition. “Even though I worked for [a] utility and favored deregulation,” says Wayne Harbaugh, BGE senior manager for regulatory affairs, “I recall warning about Enron’s promises back then of 30 to 40 percent reductions in electric rates” resulting from deregulation. But, as Office of the People’s Council director Patricia Smith remembers, “Enron was treated like a demigod.”
During the 1999 session in Annapolis, utility deregulation legislation was sponsored by the legislative leadership in both houses: by Thomas “Mike” Miller and Thomas Bromwell in the Senate, where it passed 34-13, and by Casper Taylor in the House of Delegates, where it passed 95-34. Maryland ratepayers, the legislature determined, were going to move from a regulated system of cost-based electricity prices to an unregulated system of market-based electricity prices.
There were immediate benefits to ratepayers from the deregulation bill. A 6.5 percent rate reduction was imposed, along with a six-year cap on rates—measures that Constellation Energy contends saved ratepayers $1 billion while the rate cap was in effect.
The trade-off was that BGE would no longer control its power production, and the state Public Service Commission was no longer in complete control of electric costs. Instead, BGE was forced to turn its plants over to its parent company. Constellation would now be a free-market power producer, while BGE became entirely a transmission and distribution company, generating not a single kilowatt of electricity. BGE would have to turn to the marketplace to purchase its power, from companies like Constellation. Whatever electric price BGE was charged by the power companies would be passed on to consumers.
On July 1, 2000, Constellation took control of the Calvert Cliffs nuclear plant in Calvert County, the Brandon Shores and Wagner coal plants in Anne Arundel County, the C.P. Crane coal plant in Baltimore County, and all other power plants formerly owned by BGE. In addition, BGE ratepayers began paying a monthly “commodity transfer charge” of $4.40 to cover the “stranded costs” of these plants, meaning their presumed decline in value once they began operating in the free market. When that charge is removed from BGE bills on July 1, along with removal of the rate caps, BGE customers will have paid $528 million to Constellation for this “stranded costs” charge. As it turned out, these plants not only did not suffer any decline in value, but by all estimates have increased in value immensely.
The theory behind deregulation was that during the six years of transition after 1999 electric competition would develop, particularly from low-cost natural gas generators, thereby creating downward pressures on electric prices. “Electricity: You use it. Now, choose it” became—and remains—the slogan of the Public Service Commission’s “Electric Choice” program.
But something happened that many of the opponents of deregulation had predicted. Electric competition didn’t appear. There was no electric choice for residents.
Indeed, no BGE, Constellation, or industry executive contacted by City Paper would directly answer when competition could be expected to appear. Pressed by the media during the final days of March, Constellation CEO Shattuck claimed, “We’ve always said, it’s [lower prices from competition] a 20- to 30-year process. Over a long period, it will result in lower prices for consumers.”
A review of the 1999 legislative files shows that opponents of deregulation attempted to modify the deregulation bills in a variety of ways. They opposed the payment of “stranded costs,” introduced policies ensuring affordable electric service for low-income residents, called for stipulations mandating energy efficiency and renewable energy programs. But the files reveal only one statement of direct opposition to the fundamental deregulation scheme in the legislation, and that came in a February 25, 1999, letter from Attorney General Curran.
“[T]hrowing the doors open to competition will not alone ensure that the post-deregulation structure of the electricity generation and supply market will be competitive,” Curran asserted. “As we have seen in the cable industry, deregulation without competition can result in higher not lower prices.
“Because of the risks of overly generous stranded cost recovery and the possibility that sufficient competition will not materialize, it is [best] to maintain regulation until we are assured that the transition to a competitive market has been completed,” Curran urged legislators. “Only when a truly competitive market has been achieved should regulatory and legislative protections be removed.”
But Curran’s warnings were not heeded. Recalling his 1999 concerns about deregulation in an interview with City Paper, Curran says, “We felt that while there might be a benefit from deregulation to a large industrial user, that might not be the case for the hundreds of thousands of residential users, who would have to figure out what’s best and how to shop for it.
“Our attitude was that if you’re going to deregulate, make sure first that there’s competition for the residential customer,” he continues. “Don’t uncouple the power plants from the delivery system until you’re sure that there are other power generators that will compete and provide energy for residents. Theory is one thing. Reality is another.”
The reality In the six years following the passage of the deregulation law has been that natural gas prices escalated rapidly, due to mounting global demand, instability in the Middle East, and the dramatic effects of hurricanes Katrina and Rita on U.S. natural gas production.
While all of this would inevitably have had some effect on BGE prices under the old regulatory system, most analysts agree that it would not have resulted in a 72 percent rate increase. More than three-quarters of the electric production from the plants BGE turned over to Constellation comes from coal and nuclear facilities, which, environmental concerns aside, produce power relatively cheaply. Under the new, deregulated system, the price of the electricity those coal and nuclear plants produce is no longer based on their own relatively low production costs. Instead it is more or less pegged to the market price of electricity, usually determined by prices from plants burning gas or oil.
By comparison to Maryland, state Sen. Green cites what happened in Michigan, as detailed by Hancock in his March 12 Sun column. Michigan has phased in a deregulation plan since 1999 under which the utility held on to its coal and nuclear plants. Michigan ratepayers faced only a rate increase of 9 percent when similar rate caps expired Jan. 1. “We made a mistake when we gave away our plants, the most valuable asset we had,” Green says with evident anger. “As of now, we’re at the point where the most important thing is to have leverage over the merger.”
The merger he refers to is the proposed $11 billion buyout of Constellation, including BGE, by Florida Power and Light. State legislators have passed bills through the House and Senate that would give them unprecedented power to oversee and approve or disapprove a utility merger such as the one involving Constellation, functions generally carried out by the Federal Energy Regulatory Commission. Whether the legislators are serious about trying to shape or block the merger, or are merely looking for a bargaining chip in negotiations over the 72 percent rate increase, the legislation highlights that it is not BGE, but Constellation, that is now in control.
When representatives of the 800,000-strong United Seniors of Maryland testified on the impact of the rate hike before the Senate Finance Committee, they raised the specters of death and dislocation. They testified to the plight of frail seniors on fixed incomes who would be unable to afford air conditioning during summer peak heat. State Sen. Lisa Gladden (D-Baltimore City) also worries about a potential grisly parallel with the number of deaths that occur each winter from fire caused by families cut off from their utility power at current rates who resort to candles and indoor fires for light and heat. On March 12, The Washington Post highlighted 77-year-old Don Dunn of Howard County, for whom the rate increase, combined with property tax increases due to rising home values, meant that he might have to sell his home. On March 11, The Sun profiled 63-year-old Velma Moseley, a disabled individual in West Baltimore who depends on electrically charging her wheelchair.
“We understand that it’s painful,” Constellation CEO Shattuck told The Sun on March 10, referring to the transition to high-cost market electric rates. But addressing such pain can only be an afterthought, a charitable contribution, for a company whose sights are set on growth into a domineering global energy corporation.
Constellation’s primary business is “merchant energy”—the production of electric power and the wholesale of it to utilities like BGE, or directly to large commercial and industrial customers. While BGE’s total 2004 revenues were $2.7 billion, Constellation’s merchant energy business reaped revenues of over $12.5 billion by selling its power in deregulated markets all over the country. Constellation is now a Fortune 200 company, the largest of its kind in the nation.
Constellation’s 2004 Form 10-K, a detailed analysis of the company filed annually with the U.S. Securities and Exchange Commission, answers an important question about the company and its subsidiary BGE’s rate increase: Despite the six-year rate caps on BGE electric prices, BGE has been consistently and increasingly profitable. Constellation and BGE claim that during these past six years of rate caps BGE has been unable to recover all of its costs in delivering electricity to its customers. While that may be true, this has not prevented BGE from netting profits of $99 million in 2002, $107 million in 2003, and $131 million in 2004. In other words, any additional cost recovery would have been more profit on top of those profits.
Constellation’s 2004 Form 10-K also shows that, even before the Maryland rate-hike debacle, the company was aware of and warning its investors of a backlash against deregulation throughout the nation. “While many states continue their support for retail competition and industry restructuring,” the company 10-K report advises, “other states that were considering deregulation have slowed their plans or postponed consideration. In addition, other states are reconsidering deregulation.” Although couched in matter-of-fact language, this is a strong cautionary statement from a power company whose growth depends almost entirely upon deregulated electric markets.
But Constellation, like any business, does not leave things to chance when it comes to dealing with state government authorities. It plays to win.
Constellation, and the rest of the power industry, is the most “wired” interest group in Annapolis, says Brad Heavner, director of the pro-consumer Maryland Public Interest Group. “I have been literally surrounded by utility and power company lobbyists in Annapolis,” he says, “either blocking my access to a legislator or interfering with my conversation with a legislator.”
In addition to the more than $400,000 Constellation has spent on political campaign contributions in Maryland during the past seven years, and hundreds of thousands of dollars more on lobbyists, the company’s influence reaches into the most powerful sectors of Maryland life. Constellation executives and managers sitting on the boards of nearly 300 organizations. UMBC President Freeman Hrabowski III sits on Constellation’s board of directors. The chairman of the University System of Maryland’s Board of Regents, David Nevins, serves as its public relations executive. Constellation is also a major sponsor of the Baltimore Ravens. When the March 8 Sun carried the front-page banner headline “BGE Bill to Increase $743,” Sun Maryland section columnist Laura Vozzella devoted most of her space to a smiling Molly Shattuck—39-year-old wife of Constellation’s CEO— who had once again made the Ravens cheerleading squad, “an inspiration to aging cheerleaders.”
Former energy industry managers and operatives are also well positioned within the “business-friendly” Ehrlich administration. Buried deep within the state’s executive branch is the Maryland Energy Administration, an independent agency whose origins go back to the oil embargo crisis of 1973-’74. Charged by law with the responsibility to be a driving force in state energy policy, including “to develop strategic plans and implement policies relating to energy supply management,” the Maryland Energy Administration has been largely out of sight during the electric rate debates. Frederick Davis, who assumed the helm of the administration in January, was a 22-year government affairs lobbyist with the Edison Electric Institute, the national trade organization for electric utilities. Indeed, Davis says that his position was secured “not so much by my relation with the governor, who I only knew slightly when he was a member of the Energy and Commerce Committee in the House of Representatives, but mainly through my connections with BGE.”
But it is the Maryland Public Service Commission where the influence of the power industry and the utilities has brought the greatest scrutiny from the legislature and the media. While Ehrlich-appointed PSC Chairman Kenneth Schisler claims that the 1999 deregulation law constrains him from doing more about the rate increase than assuring that the process is lawfully implemented, even Republican Sen. E.J. Pipkin found the PSC at fault for raising 50,000 BGE customers’ bills in advance of the official July 1 rate increase date. The upper Eastern Shore senator gave that as his reason for being the only Republican in the Senate to vote for a bill essentially firing the current PSC members and reassigning the power to appoint PSC commissioners largely to the legislature.
In this crucible of media scrutiny, Schisler has shown his partisan as well as his pro-industry stripes. On March 20, in the midst of revelations in the media of e-mails showing that Schisler had a close, self-serving relationship with the power companies and their lobbyists, the PSC chair made himself available for a series of interviews with area television media in his offices on the 21st floor of the William Donald Schaefer Tower. This seemingly was the moment for Schisler to demonstrate that he is the nonpartisan, public-serving expert manager prescribed for a PSC commissioner. The main text of Schisler’s carefully scripted message was that, while he understood the need for a scapegoat in this situation, he was simply carrying out the duties of his office as prescribed by the state legislature’s 1999 deregulation law.
But as he neared the end of his statement, Schisler wanted it to be known that it was Max Curran, a former Public Service commissioner, Attorney General Curran’s son, and Baltimore Mayor Martin O’Malley’s brother-in-law, who unsuccessfully voted in 2003 to include some portion of utility taxes in electric rates. And Schisler, with shaking hands, was handing out the documents to prove it.
Schisler was, in fact, echoing a charge first made five days before by the Maryland Republican Party. “It’s time for O’Malley to tell Marylanders the truth about his party and his own brother-in-law’s role in setting the stage for massive 72 percent utility rate hikes,” Republican Party spokeswoman Audra Miller said in a press release distributed March 15. Asked by City Paper whether she was serious about her statement, Miller said yes, that “Martin O’Malley’s party and family are responsible for the pain Marylanders will be experiencing.”
The governor’s race, and the rest of the 2006 election cycle, is inevitably driving much of the rhetoric around the rate-hike issue. While attending the March 23 hearing of the Senate Finance Committee, O’Malley’s Democratic gubernatorial primary opponent, Montgomery County Executive Douglas Duncan, was asked whether or not he agrees with the Republican Party critique. “Well,” Duncan said, “his brother-in-law did serve on the commission. And his running mate [Prince George’s County Del. Anthony Brown] voted for the deregulation bill.”
How much of a role the rate-hike crisis and deregulation will play in voters’ decisions come the September primary and the November general election is impossible to predict. But politicians in contested races seem to be taking no chances. State Sen. Paula Hollinger, D-Baltimore County, thought that her run for the 3rd District congressional seat being vacated by Ben Cardin would be paved by her successful fight for stem-cell research funding. But as the legislative session drew to a close, Hollinger, who voted for the 1999 deregulation measure, introduced bills to impose a 50 percent windfall-profits tax on utilities, terminate the existing PSC members, shift the power to appoint a majority of members of the Public Service Commission away from the governor, and relocate the Office of the People’s Counsel within the Attorney General’s Office.
While The rate-hike crisis may recast more than the rhetoric of the 2006 election, how it actually alters governance of the state’s deregulated electric system remains to be seen. Most analysts believe that, one way or another, BGE and Constellation will come to terms with the Maryland political establishment. The outlines of a deal have been obvious for some time. The utility and the power company will put up some money to write down the cost of the increase to ratepayers. Constellation’s initial offer was $150 million—the equivalent of one year’s BGE profit and an amount, Constellation says, that can be covered by savings it will achieve from the merger with Florida Power and Light. Toward the end of March, Constellation increased that offer to $358 million—an amount that legislative leaders still expressed dissatisfaction with.
Whatever the ultimate Constellation contribution, the remaining amount of the rate increase is expected to be phased in over a period of time. But such a scenario still leaves legislators like Lisa Gladden wondering about the future. “Everyone will declare victory and satisfaction with the result,” she says. “But what comes next? We need an energy plan.”
Any energy plan that would interfere with deregulation and the hoped-for development of competitive markets is the opposite of what some people want. In early March, Harry Warren, president of Washington Gas Energy Services (WGES), announced an offer to Baltimore consumers of electric rates 6 percent lower than BGE’s post-rate hike charges. “[In] this current high price environment, we will see a substantial number of companies move to offer competitive electric supply,” Warren says. “We’re hoping the legislature does not make major changes to the 1999 [deregulation] law.”
WGES, which does not own any power plants and depends on wholesale electric suppliers just like BGE, currently serves 25,000 to 30,000 residents with electricity, most of them in Maryland’s D.C. suburbs covered by the PEPCO utility. The company secured the electric business of those customers one by one, Warren says.
But some energy experts worry that marketing to individual electric customers will simply prove too expensive and onerous for both suppliers and consumers to make it work. There is a move afoot—and a bill proposed by Sen. Green in the legislature—to create the ability for large groups of Maryland residents to enter the electric market together as a means of securing lower prices. Under this kind of plan, known as “aggregation,” a city or county or other locality could bypass its utility and go out to bid for electric supplies. Montgomery County Executive Duncan said during a March 28 press conference that cities and government agencies in his part of the state have already successfully done so. But there remains opposition to this from the utilities, including BGE, which would lose customers, and doubters, such as Pipkin, about whether local governments can do any better in the energy markets than a utility.
Environmentalists, who have by and large stayed out of the rate-hike controversy, see some potential positive developments arising from the higher cost of electricity. Energy efficiency measures and renewable energy sources, such as solar and wind, become that much more cost effective with every additional penny that a kilowatt hour costs. “This will send a price signal to consumers that investments in energy efficiency and renewable energy pays off,” says Peter Lowenthal, executive director of the Maryland-D.C.-Virginia Solar Energy Industries Association.
“The energy companies used to claim that fossil fuels like natural gas were best because of the relative certainty of low prices,” says Gary Skulnick, executive director of Montgomery County-based Clean Energy Partnership, a “green chamber of commerce” composed of businesses seeking to increase energy efficiency and renewable energy in the commercial sector. “But now fossil fuel prices are more volatile than ever before, while renewable energy offers real price stability. Once you put a solar panel on or a wind turbine up, that’s the total cost. The fuel, whether it’s sun or wind, is free.”
But some of the nation’s leading energy-efficiency advocates worry that the deregulated market still leaves efficiency measures out in the cold. “Deregulation by itself results in people shopping for the lowest-price electricity rather than the lowest cost, which comes from efficiency,” says Joel Swisher, managing director of research and development at the Colorado-based Rocky Mountain Institute, an energy think tank run by respected energy guru Amory Lovins. Swisher says that what’s lacking in most cases is a proactive program to secure this lowest-cost energy efficiency.
In another way, the newly deregulated system has already established tremendous benefits for the environmental cause. When the Healthy Air Act, which forces power plants in Maryland to spend hundreds of millions of dollars on pollution control equipment, came up before the state Senate on March 20, Sen. Thomas Middleton (D-Charles County) questioned whether this would add to the ratepayers’ economic burden. But the act’s lead author, Sen. Paul Pinsky (D-Prince George’s), explained that under deregulation, Constellation or other power plant owners would not be able to pass these costs on to ratepayers—they would have to come out of their own bottom lines, as they can only charge utilities the market price of electricity.
But in the short term, whatever the results of this legislative session’s negotiations with Constellation and BGE, Maryland will continue to be a state with a deregulated electric monopoly. Having lost control of the state’s power supply and electric costs with their 1999 deregulation law, state legislators this year have attempted to regain some influence only over the immediate 72 percent rate hike. So far, though, the economic and political cost of that decision back in 1999 finally coming due has not proved high enough to shift the commitment to deregulation itself.
That is an unacceptable result to Tyson Slocum, director of the Washington, D.C.-based Public Citizen Energy Project, a national public interest lobbying group with a longstanding opposition to deregulation. “Deregulation is a dismal policy failure,” Slocum says. He cites the 2001 deregulation disaster in California, which ultimately resulted in the 2003 recall of the governor there, and adds that several states have repealed deregulation. “There should be an immediate transfer of the electric generating plants back to BGE,” Slocum says. “That should be ordered by the state, and if Constellation doesn’t comply, go in there with the National Guard and seize them.”
Slocum is not merely an inside-the-Beltway public interest bystander. Along with Baltimore Association for Community Organizations for Reform Now (ACORN), the Maryland Public Interest Research Group, a couple of union locals, and the Florida Consumer Action Network, Slocum and Public Citizen are official intervenors before the Public Service Commission in an attempt to block the Constellation/Florida Power merger. “The merger will mean that Constellation will no longer be incorporated under the laws of Maryland but under the laws of Florida. When that happens,” Slocum says, “then there’s nothing the state can do.
“Some people think I sound radical,” Slocum acknowledges. “What is really radical is what Constellation and BGE did in 1999 with deregulation. They’re the radicals. We’re calling for a restoration.”
Certainly restoration of Marylanders’ sense of control over their energy and its cost (and their larger economic futures, which are affected by both) seems to be what people want. When 19-year-old Rushonna Watkins, a supermarket clerk at Eddie’s of Roland Park on North Charles Street, is asked what she thinks should be done about the BGE rate hike, her mouth turns down and her shoulders sag. “What can you do?” she asks, as she turns back to work. “They’re a monopoly.”
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