Electricity suppliers fear BGE outflanked them in deregulation; Pending deal continues company's dominance, say rival utilities


As Maryland moves closer to deregulating the sale of electricity, the so-called "shopping credit" -- a benchmark price charged consumers -- has emerged as a pivotal issue.

Once electricity prices are no longer regulated July 1, the shopping credit will be crucial in determining whether Baltimore Gas and Electric Co., the state's largest utility, will face real competition.

Under deregulation, BGE's bills to customers will list separate charges for functions such as energy generation, transmission and meter reading.

The shopping credit is what BGE will charge customers for generation, or services related to producing electricity, the part of the business that is being deregulated.

Thus, the shopping credit is the price other suppliers would have to beat to offer a competitive alternative.

But a group representing out-of-state companies that want to compete in the Maryland market says the shopping credit established under a tentative deregulation settlement is artificially low and, in effect, protects BGE from competition -- at least initially.

Under the pending settlement, which has been endorsed by BGE, the state people's counsel and other parties, the shopping credit charge to residential customers initially would be 4.224 cents per kilowatt hour, but would rise to 5.02 cents in six years.

The Mid-Atlantic Power Supply Association (MAPSA), a New Jersey-based group representing out-of-state power marketers that want to sell in Maryland, instead wants a shopping credit of 5.7 cents per kilowatt hour.

A higher credit would allow competition that would ultimately benefit customers, said Gary Alexander, an attorney with Annapolis-based Alexander & Cleaver, who represents MAPSA.

Sheldon Switzer, BGE's director of electricity pricing and tariffs, defends the shopping credit, arguing that power rates in BGE's service area are so low because the utility has controlled its costs.

The people's counsel, which represents consumers, has signed off on the deal primarily because it includes a six-year, 6.5 percent average rate cut for residential customers.

Michael J. Travieso, who heads the office, says the rate cut offers guaranteed benefits while competition only promises them.

Alexander said consumers are not guaranteed any benefits after six years, at which time BGE will likely try to recover the revenue it lost during the rate limit.

The settlement also would allow BGE to collect $528 million in so-called transition or "stranded costs" from customers -- what it claims as partial repayment for the cost of building power plants that were being underwritten by previous rates.

The state Public Service Commission, which regulates utilities, will decide whether to adopt the settlement next month.

Its decision on the shopping credit will shape competition for electricity in Maryland for years to come.

Although deregulation is in its infancy nationwide, experience so far has shown that a high shopping credit fosters competition while a lower shopping credit smothers it, said John Hanger, president and chief executive officer of Citizens for Pennsylvania's Future, a group that deals with economic and environmental issues related to utility restructuring in that state.

Pennsylvania, which opened its utilities to competition in January, is often viewed as a model for electricity restructuring because it managed -- in various parts of the state -- to offer high shopping credits, deep rate cuts and extended rate freezes.

In comparison, Massachusett's shopping credit initially has been set at 2.8 cents per kilowatt hour, limiting competition thus far, said Matthew Brown, energy program director for the National Conference of State Legislatures in Denver.

The group advised the Maryland General Assembly when it crafted the state's deregulation law.

In California, competition has been limited for residential consumers, where only 2 percent of residential customers have switched power providers. In contrast, nearly 30 percent of industrial customers have chosen another source, Brown said.

That state's version of the shopping credit -- which is not fixed, but is linked to the fluctuating wholesale price for power -- does not include electricity's retail price, he said. It's generally expected that shopping credits should be set high enough to allow competitors to enter the market.

"Everyone else coming into the service area has marketing costs," Brown said. "Utilities don't have to worry about those."

In Pennsylvania, nearly 450,000 residential customers, about 8.5 percent, had switched power suppliers as of July 1, said Sonny Popowsky, the consumer advocate of Pennsylvania, that state's people's counsel.

Nearly 80 marketers are active in the state, with about half a dozen serving the residential market in any particular region of the state, he said.

PECO Energy Co., the state's largest utility, has the highest shopping credit -- at 5.65 cents per kilowatt hour -- of any power company in Pennsylvania. As a result, about 200,000, or 15 percent of its residential customers, have switched suppliers.

In contrast, Allegheny Power, a subsidiary of Allegheny Energy Inc. of Hagerstown, has lost only about 1 percent of its residential customers to competitors, Popowsky said. Allegheny Power has the state's lowest shopping credit at 3.2 cents per kilowatt hour.

The difference between the two companies, Popowsky said, is PECO had the highest rates in the state before deregulation, while Allegheny had the lowest.

"PECO's rates were much higher than anyone is paying in Maryland," he said. "So there was more room to give a higher shopping credit.

"But with a company with rates like Allegheny's, there was very little room for customers to switch and save anything," he said.

Hanger said the amount of the shopping credit is vital in determining how much competition there will be. "The real danger with a low shopping credit is that competition may never follow," he said. "The law says the market is competitive, but just the threat of entry does not make a market competitive."

In Maryland, advocates and opponents of the proposed settlement are sparring mightily over how much the shopping credit should be worth.

The shopping credit of 4.224 cents per kilowatt hour amounts to BGE's monthly charge to each residential consumer for generation, transmission, fuel and a conservation surcharge.

Consumers who switch should look to pay a power marketer less than 4.224 cents per kwh for generation-related services in the first year of deregulation.

Low power rates in BGE's service area do not leave room for a higher credit, said Switzer, the company's director of electricity pricing and tariffs. BGE residential customers have not had a rate increase since April 1993, he said. Fuel rates also have fallen during the same six-year period.

"Knowing that competition was coming, [BGE] did everything we could to control costs and become more efficient," Switzer said. "Had we not controlled our costs, there would have been a lot more room for a higher shopping credit.

"What we are being criticized for is having low rates in Maryland," he said.

Raising the shopping credit to 5.7 cents per kwh, in addition to offering a residential rate cut of 6.5 percent, would jeopardize BGE's ability to maintain service to its customers, Switzer said.

BGE would see its rate of return for its distribution business for residential customers fall to about 3 percent from the current 9.4 percent. At that rate, Switzer said, "our reliability of service would be affected."

If the Public Service Commission approves a shopping credit of 4.224 cents per kwh, competitors would find it nearly impossible to undersell it, says Alexander, the MAPSA attorney.

"We're not arguing that there shouldn't be a rate cut. Nothing has to be taken away from the residential class, and no customer has to pay more," he said.

The commission "has the authority to give a rate reduction without deregulation," he said. "Why did we have [deregulation] legislation in the first place if we have to wait six years for competition? That's not exactly electric choice."

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