Deregulation yielding little competition


Last fall, Christopher R. Cook, armed with a $21 million budget, started shopping for cheaper electricity for his high-profile government clients in the Baltimore metropolitan region.

The energy consultant wasted little time. He called all the power companies in his Rolodex, met with his connections in the industry and e-mailed a list of 36 suppliers registered in Maryland to sell electricity to customers. Despite his efforts, only three companies bid for the multimillion-dollar contract in December.

"We were asking for over $21 million worth of electricity," said Cook, a principal in E3 Energy Services LLC, an Arlington, Va., firm representing Baltimore among other clients. "That's a big deal, but apparently, it wasn't big enough in this competitive market. You'd like to get 20 bids, but I guess we were fortunate just to get multiple bids."

Cook's experience raises serious doubts about the development of a competitive market for electricity just as the first real test of Maryland's deregulation plan approaches.

In June, more than 400 of the largest companies in Baltimore Gas and Electric Co.'s service territory will no longer enjoy electricity rates that have been frozen for the past two years, and will have to either choose an alternative energy supplier or stay with BGE and be subject to volatile spot market prices.

As these customers, who have the buying power and energy needs of a small town, scramble to nail down contracts that offer stable energy prices in an unregulated market, they are finding few suppliers, higher rates and little interest for their business.

Their limited success could spell trouble for the state's smallest and most vulnerable customers - residents - when price-freeze rates begin disappearing for them in 2004.

"The fact that hundreds of customers are going into the market in June with so few suppliers out there who want to do business here - that's a huge indictment of competition," Cook said. "It really raises a red flag."

State lawmakers, large companies, local utilities and regulators had high hopes for deregulation when the General Assembly adopted the law in 1999, which separated the electricity business into two sides - delivery and supply. While regulated local utilities such as BGE would continue delivering electricity to consumers, people would be free to buy power from another company.

The premise was that customers large and small would find cheaper prices as more energy companies flocked to the area to compete for their business.

That hasn't materialized so far.

Whether competitive prices and more choices materializes in time for residential customers is anyone's guess - rate freezes end as soon as 2004 for residents in suburban Washington and 2006 in BGE's territory.

"I don't think anyone knows the answer to that," said financial consultant Stephen G. Hill, who has worked with consumer advocates across the country on deregulation issues, including Maryland. "If you look at it now it doesn't look promising."

In a recent, scathing report, the state people's counsel - the agency that represents residential customers in utility matters - said electricity deregulation has failed to produce much competition and new services for customers since it began 18 months ago.

According to the report, only 2.6 percent of the state's residential customers have switched to an alternative energy supplier and only one company is soliciting new residential customers. In BGE's territory, the report said 14 residential customers switched to another supplier.

In addition, only 4.1 percent of industrial and commercial customers statewide have switched, and in BGE's territory, just 0.2 percent, or 278 customers, according to the people's counsel report.

"We don't know what will happen when the price caps do come off for part of the market in 2004," said Del. John A. Hurson, a Montgomery County legislator whose House committee oversees deregulation issues. He wrote a letter to industry leaders two months ago asking for a review of deregulation after a year of turmoil in the energy sector.

"We should be concerned that we don't see the formation of any significant potential competitors in the marketplace."

When a rate freeze ended in San Diego in the summer of 2000, San Diego Gas & Electric was able to pass soaring wholesale costs on to its customers. Bills for residential and business customers doubled and tripled.

That shouldn't happen here because power is plentiful and rates are more stable in the wholesale market for electricity that includes Maryland, industry experts said. But changing federal guidelines and industry problems such as the Enron Corp. fiasco put a damper on competition everywhere and could change that.

Weak competition has made it hard even for BGE's largest customers, better known as Schedule P (for primary) customers, to find great deals. Schedule P customers use an average of 2,459 kilowatts per month. In comparison, a typical household uses 3 to 4 kilowatts a month, according to BGE's electric pricing and tariffs unit.

Only 12 of BGE's 425 Schedule P customers have switched so far - even though the June 30 deadline is bearing down. At that point, state law requires that they switch to another electricity supplier or stay with BGE and pay market rates, plus a service charge of seventh-tenths of a cent per kilowatt hour. Market rates for electricity can be very volatile, influenced easily by factors such as weather, demand and power plant shut downs.

"On the East Coast, this will be the first significant group of customers that actually wind up having to pay real market prices if they stay on default service," said Calvin Timmerman, director of the research and economics division of the Maryland Public Service Commission, which regulates utilities in the state.

"Some are doing their homework, some are not. It's true that suppliers aren't eager to make commitments at this time, but I would hope far more are out there by spring.

"It may be too soon for them to feel comfortable about offering rates now," Timmerman said.

For customers such as Greater Baltimore Medical Center in Towson, time is of the essence.

Sam H. Mosley, GBMC's director of maintenance and engineering, is responsible for about a million square feet of hospital space packed with several critical-care units, 27 operating rooms and thousands of pieces of life-saving equipment that all depend on electricity seven days a week.

To find a stable power supply that won't break the hospital's budget, Mosley began collecting data on how much energy the hospital uses monthly. Such information is crucial, since Schedule P customers pay rates that change depending on time of use, with prices highest during peak hours of demand.

With that information, Mosley will prepare a request for bids tailored to GBMC's specific energy needs. Currently, he is talking with just three potential suppliers.

"I feel there will be an adequate amount of suppliers when we issue our request for proposals," Mosley said. "But I had to bug them a little bit, too. We'll do everything we can to get the best price for the electric power we need."

He's hopeful that more suppliers will gain interest, but suspects that the hospital will still end up paying more under a contract than what it pays now under the rate freeze. Currently, Schedule P customers pay an average of 3.87 cents per kilowatt hour.

Energy consultants said it was worth paying a small increase to avoid market prices.

"Customers don't understand the risk that they're taking if they don't secure an alternative supply when the price freeze ends," said Cook, who managed to save about $1 million in a one-year contract for 19 members of the Baltimore Regional Cooperative Purchasing Committee. "There could easily be some months where their bills double. When that happens, they'll scream, 'My God. What happened to my electric bill?'

"In a theoretical worst case scenario, their electric bill could bankrupt them."

The pending June deadline and threat of higher costs for Schedule P customers have transformed the normally sparse meetings of the Association of Energy Engineers into a lively forum for debate.

On a recent January evening, small and large business customers, suppliers, energy consultants and utility executives packed Snyder's Willow Grove restaurant near Halethorpe for the Baltimore chapter's monthly dinner meeting.

"We had members, but no one was showing up for the meetings," said Tom O'Neill, a member of Baltimore's AEE. "But this is one topic that has gotten people's attention. I think a lot of people are bracing themselves. We're telling consumers that the one thing you don't want to do is do nothing."

At the January meeting, some customers jumped at the opportunity to pigeonhole potential suppliers for future contracts. Suppliers warned customers to prepare to increase their energy budgets. And consultants urged more suppliers to enter the market and customers to start locking in prices now.

"Customers coming off price freeze will see a significant increase in their bills because summer rates will kick in by then," said George R. Owens, president of Energy and Engineering Solutions Inc., a Columbia consulting firm. "There are just a handful of suppliers doing business right now. When deregulation was first talked about, we were deluged with calls from suppliers. Now you have to go after them. It's disappointing to go from being courted to being ignored.

"But I still believe deregulation, intellectually, is the right way to go," Owens said. "Unfortunately, it's difficult now to see any advantage from deregulation for customers. Over time, I think there will be significant benefits. I don't know what the residential market will be like in four years. But this is the first real test. It's almost a test by fire."

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