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Power plant subsidies were never needed [Commentary]

The Maryland Public Service Commission (PSC) currently has an opportunity to ensure that Maryland consumers are not on the hook to pay for hundreds of millions of dollars in subsidized electricity that will be generated at Competitive Power Ventures' (CPV) St. Charles facility. The PSC should act in the best interest of Maryland consumers and repeal the subsidies.

In 2011, power plant developers convinced the Maryland PSC, as well as their counterparts in New Jersey, to require the two states' respective electric utilities to enter into long-term contracts that would provide billions of dollars in subsidies to build new power plants. Not only did the developers claim that they could not build new generation without the handouts, they also convinced state regulators that if new generating plants were not built the lights would soon go out. Moreover, developers also dangled the potential benefits of hundreds of new construction jobs and additional local economic development.

The developers argued that Maryland families and businesses should pay these subsidies through a new charge in their electric bills. Unlike Massachusetts, Illinois, Ohio, Pennsylvania and other states that rejected these arguments, the Maryland PSC bought-in, reasoning that power plant developers would never build the plants without the free money. To further sell their subsidy plans, the developers argued that, by selling this additional generating capacity into the PJM wholesale electricity market, prices would fall so much that Maryland consumers would be better off. It was to be the classic free lunch: a subsidy that would more than pay for itself in the form of lower electric prices benefiting everyone — everyone, that is, except generation companies unlucky enough to not receive subsidized largesse.

In August 2012, CPV, a leading advocate for the subsidies, won a contract from the Maryland PSC to build a 725 megawatt gas-fired generating plant in St. Charles. Under the contract, CPV would be guaranteed a set price each year for the power it provided. If the market price were lower than this set price, Maryland electric consumers would pay CPV the difference. If the market price were higher, CPV would refund the extra money back to consumers. Although the deal appeared to provide consumers with protection against rising market prices, in fact, the contract price was set far higher than the projected market price and escalates each year. Thus, CPV would be guaranteed tidy profits, with little likelihood of ever having to refund money to consumers.

This arrangement was upset — at least for now — last fall when the United States District Court for Maryland ruled it unconstitutional for states to regulate wholesale rates. Although CPV has appealed the court's decision, a funny thing has happened. Despite threatening not to build the St. Charles plant unless it received its long-term subsidy, the company recently reversed itself and is selling ownership shares in the facility and is arranging financing. CPV made the same decision in New Jersey and already has commenced construction of its plant in that state. Hess Corporation, another contract subsidy winner in New Jersey, also continues to build its plant even though its subsidy contracts were voided. Likewise, other developers that never claimed a need for subsidies in the first place, have begun building new plants without the government subsidies.

So, it's a happy ending right? Power plants are being built and customers are not on the hook for hundreds of millions in subsidies. Not so fast. CPV is appealing the federal court decision in Maryland. But, they are not alone. The PSC is also appealing the federal court's ruling and fighting to restore the very subsidies that CPV and other developers now admit that they do not need.

Government plays an important role in ensuring that markets work. But corporate welfare should not be doled-out where it is not needed. Moreover, when government picks winners and losers, handing out windfall subsidies to some but not all market players, it chills the environment for investment without subsidies. The Maryland PSC has an opportunity to correct a mistake and not force customers to bear risks that CPV's shareholders, and shareholders of other competitive generating firms, should bear. That's why the PSC should seize this valuable opportunity provided by federal courts to rethink and rescind these unneeded subsidies. At a bare minimum, the PSC should rethink whether its initial assumption — that plants would not be built without "subsidies" — is still true.

Jonathan Lesser, PhD, is the President of Continental Economics, Inc., an energy and regulatory consulting firm based in New Mexico. His email is jlesser@continentalecon.com.

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