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A Temporary Fix

BGE's Looming 72 Percent Rate Increase Is No More, Politicians Say

Uli Loskot
"Recently we learned that BGE, is purchasing 70 percent of its power from itself," Mayor Martin O'Malley testified at the hearing.

By Edward Ericson Jr. | Posted 6/21/2006

Last Thursday, June 15, at about 1:30 a.m., state legislators passed by veto-proof majorities an extraordinary bill granting rate relief to Baltimore-area electricity consumers. The new law gives Baltimore Gas and Electric Co. ratepayers a temporary break on their bills—the increase will be 15 percent, for now, with unspecified increases coming next June 1. BGE will also give consumers back some money to reduce some of the pain, and that rebate will be applied to the fixed-costs part of the bill rather than the part relating to actual power use. In effect, BGE customers might be able to reduce their electric bills by switching electricity providers, and if they can do that they won’t lose the price break on the other part of the bill from BGE, although that part of the bill will still increase by about $2 per month.

The new law also replaces the current Public Service Commission (PSC) with five new members chosen by the legislature, and it instructs this new PSC to study why retail competition is not developing and change the power auction system that BGE used, which allegedly “locked in” the 72 percent increase.

“The legislation that we passed is by far the best plan for BGE ratepayers that’s been brought forth,” says Del. Neil Quinter, a Howard County Democrat. Not only does it reduce the immediate increase, but it requires BGE to “kick in $38.6 million in rate relief, from the get-go, that’s not contingent on the merger” that Constellation Energy, BGE’s parent company, has planned with Florida Power and Light Co.

All this assumes two things. First, that the law will not be overturned by a judge, which seems unlikely to happen because BGE’s spokesman says the company is OK with the deal. Second, it assumes that BGE/Constellation will continue to operate within a framework of deregulation—theoretically fighting for market share not just in Maryland but across America—yet effectively owning its Maryland residential market.

This latter assumption is the big one, and the one least discussed by lawmakers and power-company executives publicly. But there were hints, at the June 13 public hearing on the bill, that some legislators and other politicians don’t consider deregulated power markets to be a permanent fixture in the land.

“Recently we learned that BGE is purchasing 70 percent of its power from itself,” Mayor Martin O’Malley testified at the hearing. He urged lawmakers to concentrate not on “how to pay” the 72 percent increase but on “what is a reasonable rate of return” for BGE, the benchmark for a regulated system.

Montgomery County Executive Doug Duncan, who is running against O’Malley for the Democratic gubernatorial nomination, put it another way. “We have the worst of all possible worlds: We have monopolies operating in an unregulated environment,” he testified. “We’ve got to begin the process of reregulating the electric industry.”

Legislators picked up this theme later as they questioned BGE President Kenneth W. DeFontes Jr. Baltimore City Sen. George Della, a Democrat, asked DeFontes whether he had thought of unwinding the wholesale contracts that underpin the 72 percent increase. “You can buy your way out of anything,” Della said, though DeFontes denied it. Eastern Shore Republican Sen. E.J. Pipkin dug in on the value of the power plants that BGE gave to Constellation—along with more than $500 million from ratepayers to make up for the plants’ expected drop in value. In fact, Pipkin claimed that the plants increased in value by more than $2 billion. (“Power Failure,” April 5)

Though none of the politicians made an argument for reregulation, several touched on the reasons that make reregulation not just necessary, but inevitable, according to Tyson Slocum of Ralph Nader’s Critical Mass Energy Program.

“We need to end this whole charade that BGE and Constellation are like Mars and Venus,” Slocum says. “They’re the same company. The legislature has to play hardball. It has to poke them in the eye . . . and say, ‘You’re gonna give those power plants back.’”

Slocum says the allegedly “competitive” wholesale power market created in 1999 isn’t competitive, and that the only way for Maryland to protect its consumers from future price spikes is to return to the regulated system of 1998, when local power plants were owned by a local utility company and prices were set according to the cost to produce power, with a little built-in profit.

Constellation spokesman Robert L. Gould says Slocum’s theory isn’t credible. “He’s asking, ‘What’s your cost of production?’” Gould contends. “We don’t track it that way. It goes out on the grid. You sell forward to the grid . . . it’s nothing magical. We are selling to BGE on the open-market price, and then making a modest profit on that.”

Slocum has been studying electric power for more than a decade, including the corporate structures of energy companies. He was the first to notice, for instance, that Enron had 2,832 separate subsidiaries—a virtual catacombs of shell corporations through which to launder money. He thinks Constellation/BGE is laundering megawatts to create the illusion of a competitive wholesale power market.

“If this were a New Jersey mob boss we’d call it money laundering,” he contends. “But instead we call it power marketing. It’s a farce.”

Slocum says a Florida Light and Power takeover of Constellation would make things worse, “given the fact that FPL owns more than 2,100 megawatts of generation in the [Mid-Atlantic] regional market.” He contends that combined the companies would dominate the wholesale market even more than Constellation already does.

Slocum filed his findings to the PSC June 12 as a reply by a coalition of union and consumer groups to BGE’s 29-page May 31 letter to Senate President Thomas “Mike” Miller and House Speaker Michael Busch. The BGE letter revealed for the first time that Constellation Energy won the right at auction to serve 70 percent of BGE’s residential load under deregulation—though it also claimed that Constellation would have to buy that power on the open market, because the power generated by the Maryland-based plants has already been sold to other buyers.

In his PSC filing, Slocum claims that the merged company would likely increase its share of the BGE residential load beyond that reported 70 percent. “This means that the merger will vastly increase the ability of Constellation’s combined unregulated operations to price-gouge Maryland consumers,” he wrote. “[T]he proposed acquisition of Constellation Energy by FPL will result in dangerous levels of market power” that can only be cured by a return to the old system of regulation.

Economists invented electric deregulation, theorizing that all monopolies—regulated or not—are inefficient. With modern computers and sophisticated financial instruments, power could be traded on a nationwide, or even international, basis, much like other commodities. The problem is that electricity is not like other commodities. It can’t be stored, and the exact amount needed must be supplied on a second-by-second basis.

In addition, electric power cannot be transported efficiently over long distances because of line loss. Electricity in copper wires meets resistance and is dissipated as heat. To get power to flow longer distances, you have to generate more of it, and that costs money. That means that, despite Constellation’s claims to have sold the power from local plants into “the market,” the power generated at the Calvert Cliffs nuclear plant in Southern Maryland, Brandon Shores and Wagner coal plants in Anne Arundel County, the C.P. Crane coal plant in Baltimore County, and others owned by BGE until 2000 still flows into Baltimore and Anne Arundel counties and Baltimore City.

“They generate their power closer to BGE than anybody else,” Quinter says. “Unless their [fuel] becomes more expensive, they have a built-in advantage.”

BGE officials don’t deny that local power still comes mostly from local plants. But they say that the paperwork that makes up power’s free marketplace is what really matters. “It’s one issue to say that physically the electrons coming out of the local plant are going into his [a consumers’] house,” says Mark D. Case, BGE’s vice president of business performance, strategy, and regulatory services. “But contractually, from the point of view of ownership and investment risk, everything is different.”

What is different, it appears, is the amount of profit Constellation’s subsidiaries can earn from the output of those old BGE power plants. Under the regulated system, BGE got its cost to produce the power, plus its expenses to maintain and operate the plant, plus 8.5 percent profit.

But under the new system, the “market price” is set by the highest-priced power needed at a given hour in a given place. Power from Constellation’s big, coal-fired and nuclear plants can be made very cheaply in bulk. But other, smaller power plants fueled by natural gas and turned on only during peak demand—like when the temperature reaches 95 degrees and everyone has their air conditioner blasting—make power at double or triple the price per kilowatt. Constellation gets to collect that price for its power in the wholesale market, even if its cost to produce that power is a tiny fraction of the clearing price.

Electricity deregulators imagined that this problem could be overcome by the market. Expensive producers would be undercut by cheaper power imported from far away, they reasoned, and so prices would fall. But line loss cuts into that theory. So does congestion.

Today’s system of power lines was not designed to send much power across state lines, and it is usually constrained around larger cities as well, because cities use a large amount of power. This concentration is called transmission congestion, which creates a situation in which lower-cost electricity can’t be sent to places where it’s needed, so higher-priced power must be used from plants nearer the users. The problem has been increasing in Baltimore, according to a report by PJM, a consortium of companies that operate the power market for the portion of the country that Maryland is in. Congestion increases Constellation’s ability to bid up the price of power locally.

Slocum says he thinks the Constellation/BGE corporate structure is a shell game in which Constellation hides its profit in its subsidiaries.

The game works this way, Slocum surmises: The old BGE plants produce power at low cost and sell it on the “open market” to Constellation Power Marketing, the company’s unregulated wholesale division, at a profit. That company then resells the power to BGE for the “market price,” which is set partly by the fact that there are few other possible suppliers in the area. In each stage of the transaction, Constellation’s divisions take profits. But Constellation publicly divulges only the final transaction, in which BGE buys power at auction, and locks in a 72 percent increase for which it must now be compensated under the law.

“All their plants sell power to their marketer, so it looks like a huge power producer,” Slocum says. “But all it is doing is laundering those megawatts so they are untraceable.”

Slocum says that unless the government either scotches the merger or reinstitutes regulation according to the cost to produce electricity, Constellation and FPL will retain a hammerlock on the local market. Electricity prices will only increase, and consumer crises like this current one will be a near-annual event.

Quinter partially agrees. “The fact that BGE is part of a corporate umbrella that still includes generation seems to intuitively hold out a greater promise of reregulation,” he says. “But if they’re all of a sudden part of a corporate family that is run out of Florida, then reregulation could be much more difficult to accomplish.”

The PSC has scheduled hearings on the Constellation-FPL merger for July 12-14, though spokeswoman Christine Nizer says it is unclear whether those hearings will go on as scheduled, because of the pending turnover of the five-member commission.

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