Thanks to a nearly six-year cap on residential prices, electricity inMaryland is the one source of energy that costs less today than it did earlyin the Clinton administration.
But tomorrow is the beginning of the end for consumers who cherish carefreehours of watching television, washing dishes or basking in air-conditionedbliss.
Somewhere in the 15-story East Tower of Charles Center in downtownBaltimore, brokers for the state's largest utility will be locked in a secureroom with a contingent of state regulators, consumer watchdogs and energyconsultants. They'll be positioned in front of computer screens, waiting forsecret bids from at least a dozen power producers and energy traders who arevying to supply wholesale electricity to Baltimore Gas & Electric Co. and its1.2 million customers.
It's the third - and likely the last - in a series of one-day reverseenergy auctions that few Marylanders know about, but none will be able toignore come July. That's when regulatory price caps come off and results ofthe free-market bidding will hit household budgets with the ferocity of ahurricane, some say.
Electric bills could go up anywhere from 40 percent to 80 percent for BGEcustomers as the effects of utility deregulation are felt for the first timesince legislation restructuring the industry was passed in 1999. Customerswill learn the amount of the increase in March when bidding results arecalculated and revealed. Utilities that serve other parts of Maryland - suchas Allegheny Power in Western Maryland and Potomac Electric Power in suburbanWashington - also are holding power auctions.
BGE officials are not brimming with optimism about the imminent bidding.Rising demand for all forms of energy and hurricane-related supply disruptionsin the Gulf of Mexico last fall have sent prices for coal, natural gas and oilsoaring. All are burned to make electricity.
"Most of those [fuels] are up over 100 percent since 1999, and that'swhat's really driving up the price of electricity throughout the UnitedStates," said Wayne Harbaugh, BGE's manager of pricing and regulatoryservices.
Such auctions culminate a long transition to the free market in states thatopted for electric utility deregulation. From the Northeast to the Midwest,the bidding results have ignited a vigorous backlash from consumer groups,sending lawmakers scrambling to find a solution to an energy crisis fewanticipated when they sold voters on the virtues of competition.
The architects of deregulation envisioned a free market where scores ofretail electricity providers would compete for residential customers, drivingdown prices. But competition hasn't arrived, critics say, because the ratelimits imposed by lawmakers six years ago set BGE's prices so low thatchallengers couldn't compete. The same roadblocks are in place in other stateswith deregulated markets.
In Illinois, consumer groups have responded by trying to block that state'sfirst energy auction scheduled for September.
"It's a gloomy picture for consumers," said Pat Clark, a spokeswoman forthe Citizens Utility Board of Illinois.
Similar auctions held recently in New Jersey and Delaware raisedelectricity costs in those states by 55 percent and 59 percent, respectively,although those increases haven't filtered through to customers' bills yet. InDelaware, some lawmakers have called for re-regulating the industry, whileothers are trying to ease the transition to higher rates by phasing them inover a period of years. Similar efforts are under way in Maryland.
"One should expect more volatility under deregulation, in the way of bothhigher and lower prices," said Paul Patterson, an energy analyst with GlenrockAssociates in New York. "You're no longer guaranteed anything, and that's whatit comes down to."
Before deregulation, BGE owned its own power plants and delivered thatenergy to customers over its transmission lines. BGE still delivers power, butits generating plants belong to a different division of its corporate parent,Constellation Energy Group, which sells the electricity it produces to thehighest bidder in the wholesale energy market. Constellation recently agreedto be acquired by Florida-based FPL Group Inc., which was drawn to thetransaction in part by the Baltimore-based energy provider's thrivingwholesale trading business.
With no generation of its own, BGE must go out and buy its power in thesame wholesale market that has helped Constellation Energy post record profitsin recent years. But unlike Constellation, BGE will be looking to do businesswith the lowest bidder, not the highest.
Bidders in tomorrow's reverse auction - where the lowest bid wins - arekept secret, but it's expected that Constellation will be among those vying tosupply at least a portion of the electric needs of its BGE subsidiary in theyear ahead. However, regulatory firewalls are designed to prevent the twosides of Constellation's business from sharing information or communicatingwith each other. BGE officials say there's only one way Constellation can beatout its rivals.
"It really comes down to one number - the price that's bid," BGE's Harbaughsaid.
Harbaugh will be among those monitoring the bidding. He will be joined by alimited number of other BGE staffers, representatives of the Maryland PublicService Commission, the Office of the People's Counsel and a smattering ofenergy consultants and auditors who will be there to make sure the process isfair and delivers the best possible price to consumers.
Past participants describe the process as a little like watching paint dry.That's because participants tend to wait until just before 5 p.m. to submitbids so that they can spend all day analyzing the latest price trends inenergy markets. Even the slightest movements in the price of natural gas orcoal, for example, can influence a company's bid.
The bids can be delivered in one of three ways: by messenger, fax ore-mail. The vast majority come in electronically.
"The [utilities and regulators] all sit in the same room with computers andlaptops, so they all see the numbers come in at the same time," said GaryCohen, manager of regulatory affairs at Delmarva Power, which recentlycompleted an auction for its Delaware customers. The company serves customersin Delaware, the Eastern Shore of Maryland and parts of Virginia.
The process in Maryland began months ago, when a call was put out for bids- known as a request for proposals, or RFP. Potential bidders must becertified if they want to participate. Those that qualified attended a pre-bidconference, in which BGE officials described how much power they think theywill need to buy for various customer classes. BGE serves Baltimore City andall or part of 10 counties in Central Maryland.
Auctions are held on three days spread weeks apart in order to reduce risksassociated with one-day market anomalies, such as a spike in prices resultingfrom a cold-weather snap or, as happened last fall, a hurricane. A fourthround of bidding will be held at the end of this month if suppliers fail tobid on all of the load today.
Tomorrow's auction will be for about one-third of the total load BGE istrying to lock in. Results of the previous two rounds of bidding have not beendisclosed. Maryland residents won't find out how much their bills willincrease until mid- to late-March, when the bidding results are calculated andrevealed.
Bidders include companies like Constellation, which own power plants andtrade electricity in competitive markets. But others might be pure energytraders or investment banks, who hope to lock in long-term power supplycontracts at low prices and then resell them to BGE for a profit.
The good news for Maryland power customers is that natural gas prices havecome down considerably since the first round of bidding. That means today'sbids should come in lower than in the previous two rounds.
"Prices are probably 25 to 30 percent lower than what they were when theywere set in December, and going forward we foresee them remaining in thatrange," said Mike Woytowich, project manager for Pace Global Energy Services,an energy consulting firm in Fairfax, Va.
But even with natural gas prices trending down, BGE customers have littlechoice but to pay higher prices. In the more than six years since deregulationwas passed by the General Assembly, no rival companies have come forward topose a credible challenge to BGE as a retail provider of power.
"We have a deregulated system, but it didn't really lead to fosteringcompetition, which was the purpose of it to begin with," said Suzanne Leta, anadvocate for the New Jersey Public Interest Research Group, a consumer groupthat has monitored energy auctions in that state.
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