5:34 PM EDT, October 3, 2012
Gov. Martin O'Malley's proposal to force Maryland utilities to harden their systems against the kind of damage we saw in the summer's derecho storm raised immediate concerns among consumer advocates. The reason: It could add a dollar or two a month to residential customers' bills to compensate utilities for trimming trees, burying power lines and other activities that advocates say companies like Baltimore Gas & Electric and Pepco ought to be doing anyway. The criticism is particularly pointed in the case of Pepco, which was fined $1 million last year by the Public Service Commission for failing to invest sufficiently in that kind of grid maintenance.
But what those critics fail to appreciate is that the stakes for customers are much higher than a dollar or two a month. A report issued Wednesday by the governor's energy advisor, Abigail Hopper, estimates that the derecho-related blackout cost BGE customers a total of $320 million from lost groceries and other expenses. Pepco customers, who got their power restored on average somewhat faster, lost $230 million. In total, the power outages associated with the storm may have cost state residents almost $600 million.
The questions Maryland consumers and utility regulators need to ask themselves are: Were these recent storms a fluke, or are they likely to become more frequent as a result of global climate change? And has the state's 100-year-old model for regulating utilities, monitoring their performance and compensating them for such maintenance efforts been sufficient? Given what Marylanders have experienced in the last two years — "snowmageddon," Hurricane Irene, the derecho — the answers are clearly no, these storms are not a fluke; and no, we aren't doing a good enough job of preparing for them.
Ms. Hopper's report, which was the product of two months of public feedback and conversations with experts in electric reliability, includes 11 recommendations for hardening the electric grid. They wouldn't make the system derecho-proof, but they would help. The report calls for holding utilities accountable for their performance after storms, not just in normal conditions; accelerating and broadening existing maintenance and grid-strengthening efforts to focus more directly on parts of the system that are susceptible to storm damage; and tying Public Service Commission approval of future rate increase requests to the utilities' records of reliability and resiliency. All that is likely to please consumers. What will be a more difficult sell is the report's proposal for how to pay for the improvements.
Utilities like BGE and Pepco are regulated monopolies. The PSC determines how much they can charge, and it decides how much of the cost of grid maintenance and improvement can be passed on to customers. Historically, that has been an after-the-fact proposition. When utilities undertake a major investment — say, additional tree trimming to reduce the risk that lines will be toppled in a storm — they are allowed to seek cost recovery in the form of higher rates. Because utilities sometimes go years between rate cases before the PSC, there can be an extensive lag between expense and reimbursement.
Consumer advocates like that system because it allows for thorough review of the utilities' actions before customers are stuck with the bill. Utilities say the cash-flow issues it creates stifle the pace of grid improvements. The O'Malley administration is taking a sensible middle ground. It is suggesting that more contemporaneous cost recovery be allowed, but only for incremental expenses associated with the accelerated effort to harden the grid. That approach doesn't throw out what has been a time-tested review process but also recognizes changed circumstances and the need to move quickly with targeted investments. If the PSC really does hold the utilities to a higher standard than before and provides sufficient opportunity for public review, the governor's proposal is appropriate.
Another key question the report raises is how these costs should be assessed. Should they be spread among all utility customers or just passed on to those who are likely to directly benefit? Is it fair to ask someone whose electric lines are already underground — as has been the case for houses built since the late 1960s — to contribute to strengthening other parts of the grid? Not everyone is going to see their service improved by these investments. Should they pay? The O'Malley task force makes a strong case that the costs should be shared. Even those whose power never goes out benefit from these improvements because they will reduce the substantial cost of recovering from storms, which is passed on to all consumers.
It's understandable that Pepco customers, in particular, would worry that this plan amounts to rewarding the utility for bad behavior. But that's not what the governor is proposing. Pepco has already paid for its failings through a fine and the denial of part of its request for higher rates. Meanwhile, the task force's recommendations would substantially increase our expectations for the utilities' performance and hold them accountable for meeting those standards. Given the massive cost, disruption and public health risks associated with prolonged power outages, and the likelihood that an aging power grid and volatile climate will make them more frequent, such a change is imperative. In that context, the cost to consumers to make it possible is a small price to pay.
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