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Md. may pull plug on power regulation Legislators face task of changing system for utilities industry; Billions of dollars at stake; Businesses would gain from competition and lower prices


With all the wariness of utility workers approaching a downed power line, Maryland lawmakers are steeling themselves to take on the issue of bringing competition to the electrical power industry.

Deregulation of the industry, an idea that the General Assembly has danced around for the past two years, would affect the pocketbook interests of every Marylander who doesn't live in a cave. It's an endeavor that is breathtaking in its implications and mind-boggling in its complexity.

"It's a dull, technical issue -- except it involves billions of dollars over the next 20 years," said Del. Dan K. Morhaim, a Baltimore County Democrat.

Grappling with the matter, said an aide to Gov. Parris N. Glendening, is like "a long visit to the dentist."

The idea behind deregulation is that competition would give customers choices and drive prices down. It is an enticing argument for large businesses, which stand to enjoy the greatest benefits.

Before that can happen, the Assembly must reinvent the state's regulatory system -- or delegate that power to the Public Service Commission. Where the old system regulated all phases of the electric business, the new one would have to control a monopoly distribution system but leave power generators free to compete.

That alone is complicated enough, but deregulation also involves issues of taxation, economic development, the environment, consumer protection and poverty.

With so much at stake and so many powerful interests involved, the energy deregulation debate is a full-employment program for lobbyists. Virtually every prominent "hired gun" in Annapolis has a client with a stake in the energy plan.

The process involves such serious political perils that many legislators are wondering why they should bother. After all, the public is not imploring them to tinker with a regulatory system that has protected residential ratepayers. The governor, saving his political capital for issues dearer to his heart, isn't pushing the Assembly to act.

But House Speaker Casper R. Taylor Jr. and Senate President Thomas V. Mike Miller, who set the legislative agenda in Annapolis, have decreed that this is the year to pass a plan.

The two presiding officers -- who split over the issue last year -- are optimistic that they can get the job done in the 1999 session, which begins Jan. 13. "The House and the Senate are clearly on the same page," said Taylor.

Miller and Taylor have compelling reasons to get out front. Other states are deregulating as part of a nationwide trend. Some of Maryland's largest employers say lowering electricity costs is crucial for their businesses. Economic development advocates say power costs make up one of the biggest factors in decisions to expand or relocate plants.

The PSC is also urging action and has proposed a target date of July 1, 2000, for beginning the transition from monopoly.

'Stranded costs'

The current utilities agree that the time for competition has come, though they are continuing to press for the recovery of money they invested in building their networks -- "stranded costs."

That issue -- which involves billions of dollars in potential costs to ratepayers -- is at the heart of negotiations between power companies and big energy users over a plan that could be presented to the Assembly as a basis for legislation.

One Maryland plant whose future might depend on the outcome of the debate is the Alcoa Eastalco Works in Frederick, which employs about 675 workers in the energy-intensive aluminum-smelting business.

Earl Robbins, the plant's government affairs director, said the Frederick aluminum plant is the largest energy customer in Maryland -- paying $65 million to $70 million a year for electricity. He said the facility's costs are the highest of Alcoa's 11 North American plants -- largely because of power expenses -- making it vulnerable to competition within the corporation.

"Any time you're the high-cost plant, it certainly puts you in a very awkward position," Robbins said. "We need to see deregulation happen as soon as possible. We need it to happen last week."

Economic development arguments and a business-only consensus are unlikely to be enough to pass a plan.

Legislative leaders say the foremost concern of senators and delegates will be the effect of deregulation on residential customers, whose rates have traditionally been subsidized by business customers. Miller and Taylor said any bill would have to include provisions capping residential rates, protecting low-income customers and shielding consumers from shady business practices.

Michael Travieso, who as People's Counsel serves as Maryland's advocate for residential ratepayers, maintains that a simple rate freeze is not enough.

"We ought to figure out a way where residential consumers can get some benefits during the transition period," Travieso said. In some states, mandated rate cuts have been the political price of passing a bill.

There is evidence from other states that consumers and the environment can come out winners if lawmakers and regulators craft a well-balanced system.

Deregulation at work

In the Philadelphia suburb of Cheltenham, Uriel Rendon is saving 10 percent on his family's electric bill and buying power from an environmentally friendly source -- thanks to electric industry competition in Pennsylvania.

Rendon -- one of about 230,000 Pennsylvania customers to take part in a pilot program aimed at ushering in competition -- originally decided to go with the current utility, but switched to a New Hampshire-based company that uses windmills to generate its power.

"It just felt good to have a choice," said Rendon, a television station manager who's weighing an offer that could cut his business's $10,000- to $15,000-a-month electric bill by 23 percent.

Some in Maryland are looking to Pennsylvania as an example of a state that appears to be giving a jump-start to competition.

Maryland's northern neighbor, where high utility rates have long been a problem, will deregulate two-thirds of its electricity market Friday. The state is boasting of its deregulation plan in economic development ads, claiming that it will cut businesses' energy costs by $1 billion a year.

Sonny Papowsky, Pennsylvania's counterpart to Maryland's people's counsel, said the pilot deregulation program there has been "pretty successful" in bringing beneficial competition to the residential market as well.

'Dirty' electricity

But the Pennsylvania law does not include the tough anti-pollution provisions that environmentalists will seek in any Maryland bill. They are worried that energy deregulation could create incentives for power providers to increase their use of "dirty" electricity from the same coal-fired Midwestern plants whose emissions become Baltimore's smog.

Their allies in the legislature are drafting language that would make it expensive to use dirty electricity and create incentives to use power from such sources as solar energy and windmills.

L. Wayne Harbaugh, Baltimore Gas and Electric Co.'s project manager for deregulation, said utilities oppose such provisions, arguing that market forces and federal regulation will protect the environment. But top legislators disagree. "The environmental concerns have got to be allayed," Miller said.

One reason neither consumer advocates nor environmentalists can be brushed off is their alliance with Glendening, who is taking a show-me approach on the merits of deregulation.

Joseph C. Bryce, the governor's chief legislative aide, said Glendening will be watching to see if legislators can craft a plan that protects residential customers, the environment and state and local tax revenue.

"This is not an issue that has been generated by the governor, but as the chief executive of the state, it's an issue he plans to be active in," Bryce said.

Electric deregulation

These are among the issues the General Assembly must resolve to successfully deregulate Maryland electric utilities:

PSC authority: On a broad range of issues, the Assembly will need to decide how much authority to delegate to the Public Service Commission and how much to decide by itself.

Stranded costs: "Stranded costs" is a utility industry term for the investments utilities put into their networks and generating systems with the expectation of operating them in a regulated market. Utilities want to recover such costs, saying they were incurred under their legal duty to provide service. Critics say the utilities understate the value of their assets.

Big bang or small: Big industrial and commercial users want deregulation to start all at once on July 1, 2000, to prevent any customer from gaining a competitive advantage. Utilities want some time to phase in the system, fearing a breakdown.

Taxation: The Assembly will need to rewrite the tax code, which now treats utilities differently than other companies.

Universal service: Where the regulated company now bears the burden of making service available to everybody, deregulation means lawmakers must find a way to spread that cost to all competitors.

Consumer protection: There is broad agreement that some type of licensing is needed so that only bona fide energy-generation companies enter the market.

Environment: Environmentalists will seek rules to discourage companies from using energy from high-pollution sources.

Pub Date: 12/27/98

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