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Customers pay less with newest plan

THE BALTIMORE SUN

The General Assembly's plan to soften the blow of higher electricity bills provides the best savings for consumers of the three major plans that have emerged in the past few months, according to an analysis by several independent financial experts for The Sun.

But the savings are slight.

The average Baltimore Gas and Electric Co. customer will pay a total of $13,993.45 for electricity over 10 years and 11 months repaying a rate increase deferred under the Assembly plan.

A plan negotiated by Gov. Robert L. Ehrlich Jr. and approved by the Public Service Commission in April would have cost consumers an additional $268 over that period. One imposed by the PSC earlier this month, after elements of Ehrlich's plan were overturned in court, would have cost $308 more than the Assembly's plan.

Doing nothing and requiring consumers to pay the full 72 percent rate increase beginning July 1, when rate caps expire, would cost $312 more than the Assembly's plan.

The figures are expressed in "net present value," an accounting calculation used to determine how much future money is worth now. Financial analysts generally use present value when comparing alternative investments or spending options because it equalizes for the effects of time on the value of money.

The calculations assume, for purposes of comparison, that rates remain steady after the 72 percent increase is phased in.

"On the face of it, the Assembly's plan is clearly the best option of the three," said Glen Horning, a CPA with Stout, Causey and Horning who analyzed the three plans.

Consumer outrage earlier this year at the 72 percent rate increase set off a scramble to mitigate it, mostly by phasing it in and permitting consumers to pay back the costs of the deferral over time. The plans differed in the length of the deferral and in presumed interest costs BGE would be permitted to charge.

BGE says it must increase rates to cover higher energy costs in a deregulated market.

The Assembly plan caps the rate increase at 15 percent for 11 months, gives consumers the option of another undefined deferral after that and moves to the full 72 percent increase on Jan. 1, 2008. It requires consumers to repay the deferred amount in monthly increments of slightly more than $2 over 10 years.

For the purposes of the Sun analysis, it was assumed that consumers would opt out of a second deferral and go to full market prices next June.

If a pending merger between BGE's parent company, Constellation Energy, and FPL Group Inc., parent of Florida Power & Light, goes through, additional savings are likely.

Ehrlich's proposal deferred the rate increase for 18 months and allowed consumers to repay it over three years. The PSC plan allowed an eight-month deferral and 15 months to repay it, plus 5 percent interest charge.

"There's no doubt about it. I'd rather pay $2.19 a month for 10 years than $16 a month for 15 months," said Horning.

Other analysts who reviewed the data - and confirmed its accuracy - said although it would save money for consumers, the amount is negligible over the period the savings will be realized.

"That's less than 1 percent savings if you're talking about a sum of $20,000," said Thomas Kremer, an Annapolis-based CPA. "For a lot of consumers' pockets, it's not going to matter."

None of the experts consulted for this article does any work for the state of Maryland or for BGE. Legislative analysts also reviewed the data for accuracy.

The bill, which passed in the Senate on Wednesday night and in the House early yesterday, would increase the average BGE customer's bill from $83 to $95 beginning next month and ending June 1, 2007. After that, customers would either pay market rates - which would put the average bill at $143 - or can opt-in to another rate-relief plan for seven months that would cost extra. Beginning in January, customers would begin paying an estimated $2.19 a month for 10 years to repay the amount that was deferred.

The legislation also replaces the Public Service Commission, who Democrats and some Republicans had accused of failing to advocate for consumer interests, with new members who would study the rate increase and proposed merger.

Horning said the $2.19 a month would not be fairly distributed to consumers depending on their electricity use. A person who lives in an apartment with no air conditioning would pay the same as a family in a 6,000-square-foot home with central air.

"That really penalizes the smaller user," he said. "It hits the lower-income individual much harder than the wealthy individual."

A last point made by both Horning and Kremer is that the Assembly plan is the most generous to those who leave the state: They might not have to pay back the deferred charges after they leave, although Constellation officials say they are reviewing that provision. It is less attractive for those who move into the state: They are repaying a debt that isn't theirs.

The analysis was based on a current average monthly bill of $83 and takes into account how much customers defer under each plan and how long they have to pay it back. All those factors matter when determining which plan is most affordable.

According to what finance professionals call "the time value of money," having $1 today is better than having $1 a year from now because it could be invested and earn income during the year.

The "net present value" of the four plans - $14,305.23 for the immediate 72 percent increase, $14,301.33 for the PSC plan, $14,262.21 for the Ehrlich plan and $13,993.45 for the Assembly plan - is calculated with the assumption that a typical investor could earn 5 percent interest during the period of the deferral.

"Paying interest isn't necessarily a good or bad thing," said Art Keown, a finance professor at Virginia Tech University's Pamplin College of Business. "What's important is what the rate is relative to the opportunity cost, or what your alternatives are. It may be such a low rate that it's not really bad."

Gail Hillebrand, an advocate for Consumers Union who specializes in finance, said the PSC plan and Ehrlich's plan were flawed because, during the deferral and payback periods, consumers would not have a good picture of their electricity usage.

"Generally speaking, the best plan for consumers is the one that postpones the start the longest and phases it in as gently as possible," said Hillebrand, who also reviewed the Sun analysis.

Bob Finkelstein, executive director of the Utility Reform Network, a California-based utility watchdog, said that while the General Assembly's plan is clearly better for consumers, the best option would be to "turn back the clock."

"Nothing better demonstrates the folly of the notion that we need to deregulate this market and let the market decide what the rates need to be," he said.

"We went through this in California several years ago and our hope then was that, if nothing else, the rest of the country might learn from our experience. Unfortunately, Maryland decided to go forward with some form of deregulation."

bradley.olson@baltsun.com

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