When political leaders and regulators began working to revamp the state's electric supply system more than two years ago, they did so in part out of fear that Pennsylvania and other states were light years ahead of Maryland's efforts.

But today, those fears have largely been unrealized. In fact, a raft of states that had once surpassed Maryland's electric restructuring endeavors in the hope of trimming rates have either seen their work stall or have been forced to pull back because of complications, disagreements, lawsuits, consumer uproar or legislative uncertainty.

In Maryland, full customer choice of electric suppliers statewide is scheduled to be introduced by July 2002. California, by comparison, fully opened up its electric markets five months ago, providing customers with a mandated 10 percent rate cut.

The delays in states such as New Hampshire and New York mark not only a psychological victory for those who urged a slower, more cautious approach to altering Maryland's electric system, but they also point out just how difficult changing a century-old system rife with regulation can be.

"What they're finding, I think, is that the transition to a competitive model is an extremely complicated process," said Glenn F. Ivey, chairman of Maryland's Public Service Commission.

"It's a lesson the commission and the General Assembly are paying attention to, and hopefully we can benefit from their mistakes," Ivey said.

It's a lesson lawmakers and the PSC have already taken to heart. Originally, the PSC planned to fully deregulate Maryland's electric system in April 2001, and start a pilot program next April.

But when lawmakers objected, claiming the 2001 timetable wouldn't give the legislature enough time to draft bills related to deregulation, the PSC tacked on an additional 15 months to evaluate and prepare for competition, citing "the magnitude and complexity of the issues" that would require "additional guidance and changes in policies."

In many ways, though, Maryland's decision to postpone restructuring work was a fortuitous one, in light of the tribulations other states have weathered.

"Maryland's timetable appears to be a good one, because it will allow time for systems to be put in place and for consumer education, which is going to be critical," said Bob Fleishman, a Baltimore Gas and Electric Co. vice president and the utility's general counsel.

While New Hampshire's experience is often described as the most extreme, it is hardly atypical, according to industry analysts.

New Hampshire had been plugged in to become the first state to offer its residents a choice in electric suppliers when its lawmakers passed a comprehensive restructuring plan in May 1996.

If all had gone according to plan, competition would have been in place at the start of this year, along with a 20 percent reduction in the highest electric rates in the nation.

But in March 1997, several of the state's five electric providers filed a lawsuit against regulators in federal court, challenging a state plan that would limit the amount of money utilities could collect in so-called "stranded costs."

Stranded costs

Utilities nationwide contend they are entitled to recover billions of dollars in stranded cost investments in power plants, energy contracts and other equipment spent under regulated systems, as the only way to have a level playing field for competition.

Critics of the controversial plans, however, claim giving utilities the ability to recover their investments for periods of years will eliminate potential electric rate savings, at least in the near term.

In some cases, the stranded cost debate even threatens to derail deregulation efforts.

"We found ourselves stayed from implementing restructuring by a federal judge," said George McCluskey, director of New Hampshire's Public Utility Commission's restructuring efforts. "So it definitely had a significant impact."

Impact continues

That impact continues to this day. Although trial has been set for November, negotiations with the power concerns are continuing, and New Hampshire hopes to settle the case and introduce deregulation before the end of the year, McCluskey said.

"The utilities recognize that we're going to have competition," he added. "But there are a lot of policy changes that have to be broken down and tackled one by one."

New Hampshire isn't the only state to run into a wall over stranded costs, though.

Vermont's restructuring plan, ordered into effect by that state's regulators, sits on ice while utilities battle the government over // the reimbursements. The same holds true in Pennsylvania, where billions of dollars in stranded costs are at stake.

"There's a realization now that a lot of issues in other states were not worked out in proper detail," said Wayne Harbaugh, BGE's executive director of electric restructuring.

Hearing planned

In Maryland, BGE and four other utilities are seeking nearly $2 billion in stranded costs. Regulators plan to hold hearings on the matter next spring.

It's not only the utilities who are fighting or stalling the deregulation movement.

In California, citizens groups have succeeded in getting a referendum on the November ballot that would both lessen utilities' stranded cost recovery and double a mandated 10 percent savings.

"The only reason rates haven't gone up in California is because of the mandated decrease," said Del. Leon G. Billings, a Democrat from Montgomery County.

"Most of the information coming out says that new competitors will go after large industrial customers and not residential ones.

"The risk there is that when the current suppliers lose industrial customers, they will have to raise rates to maintain their profitability," Billings added.

California vote

Industry watchers contend the California vote could signal the future of deregulation not only in that state, but others. If the citizens groups are victorious, other states may have to go back and re-evaluate their courses of action.

"I think there's a new comfort level with our timetable, especially after you consider what's happening in California," said Ivey, of Maryland's Public Service Commission.

"As a result, there's less of an urgency in Maryland than there was six to eight months ago."

Voters in fall elections will also decide the fate of electric restructuring now in place in Massachusetts, where a citizen advocacy group's ballot initiative seeks to repeal deregulation over -- you guessed it -- stranded cost recovery, estimated at $10 billion.

If passed, the referendum would turn back customer choice that has been in place since March, and eliminate a mandated 15 percent cut in rates.

Lawmakers, too, have played a role in stalling deregulation. As was the case in Maryland's General Assembly session in 1997, legislators in Colorado and Alaska failed to agree on a package of electric reform bills before the session there ended.

And in New Mexico, lawmakers ended their 1998 session without taking action on a plan to open electric markets, citing concerns about the tax implications of competition.

Why the backlash?

Analysts and industry executives say problems have erupted in states that perhaps went too headlong into deregulation, or failed to build consensus.

Maryland's answer to the need for consensus building has taken the form of a series of weekly discussions throughout the state, involving more than 120 utility and government officials, as well as consumer advocates, commercial users, and others.

Pressure on politicians

It's easy to understand why states would so eagerly embrace deregulation, however.

Of the more than a dozen states that have embraced competition and consumer choice -- including Michigan, New York and Illinois -- most sport higher-than-average electric rates as compared with the rest of the nation, and politicians there have felt considerable pressure to save consumers money.

Maryland's rates, by comparison, mirror the national average, dampening the political pressure to simply lower costs at the expense of addressing deeper issues such as price protection and environmental concerns.

Conversely, many analysts predict significant electric rate savings likely won't be achieved with deregulation. Supporters, however, believe competition will bring increased efficiency and a greater level of services bundled together. For instance, industry watchers predict electric deregulation could ultimately lead to electric providers supplying homes with alarm systems and even cable television.

Divided opinion

But with the obstacles facing other states farther along the path toward electric competition, analysts and politicians in Maryland are split, pensively wondering if stranded cost or other hurdles could arise here, and inadvertently push the state's July 2002 date back.

"With all the stakeholders in Maryland involved as they are, combined with the fact that we're taking our time and dealing with all the issues, I think there's less likelihood of that happening," BGE's Harbaugh said.

But not everyone is so optimistic.

"There's always that potential," Ivey said. "That's why we've got to get it right the first time."

Pub Date: 8/30/98