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PSC weighs rate reforms

The Baltimore Sun

In an attempt to bring down electricity prices, state regulators are studying reforms that some argue will make it tougher for competing energy suppliers to steal customers from Baltimore Gas and Electric Co. and other traditional Maryland utilities.

The result could be another setback for proponents of utility deregulation, which is predicated on the notion that robust competition will deliver savings to consumers over time.

And as 1.1 million BGE customers in the Baltimore area begin receiving their first power bills with the newly approved 50 percent electric rate increase, regulators find themselves caught between the competing goals of providing near-term rate relief and ensuring that competition can thrive in the future.

"For many people, competition was a means to an end -- the end being that robust competition in a functioning market drives prices down," said Steven B. Larsen, chairman of the state Public Service Commission. "So now the issue is, is competition the goal, or is getting the lowest price the goal?"

The concern centers on efforts to bring prices down by scrapping the system BGE and other investor-owned utilities use to buy their power supply and replacing it with one that better manages market risks.

The PSC is contemplating doing it by mimicking some of the same innovations retail energy suppliers say they rely on to undercut competitors. At stake is the future of a free-market experiment that critics dismiss as a failure because it hasn't delivered on promised savings or competition.

Proponents counter that all they need is time and the right circumstances to prove that competition can deliver better electricity prices than state regulators.

The debate is occurring as multiple states that deregulated in the late 1990s are rethinking their decision and looking for ways to re-engineer a competitive model critics say is hopelessly broken.

In Maryland

In Maryland, the PSC was ordered by the General Assembly to study a number of potential fixes with the goal of achieving lower prices -- a command many acknowledge could clash with the goal of fostering competition.

"Competitive markets drive innovation," said Richard Rathvon, vice president of Reliant Energy Solutions East and president of the Retail Energy Supply Association, an industry trade group. "We believe that competitive markets need to flourish."

Lawmakers passed electricity deregulation in 1999 on the premise that if they opened the market, competition would deliver prices so low that in a few years no one would buy their power from BGE. The utility's future was in using its power lines to deliver electricity that competing suppliers bought for their customers.

But to accommodate the inevitable stragglers who didn't switch providers, regulators designed a means for BGE to go into the market and buy electricity to deliver to its so-called "default" customers.

Critics say the system they came up with is too rigid and wasn't designed to respond quickly to changing market conditions to achieve the best price possible. However, some argue that was the plan all along, reasoning that consumers' desire for cheaper electricity would spur competitors to find innovative ways to provide it.

It hasn't worked out that way so far. Nearly a year after rate caps expired, prospective rivals have yet to impress BGE customers, more than 97 percent of whom still get their electricity from the utility.

Only a handful of competitive suppliers are actively pursuing residential customers, and critics say their offerings provide little incentive to switch.

Changes in markets

Part of the problem is that deregulation rules failed to anticipate major changes in energy markets that would make it virtually impossible for retail energy suppliers to gain a toehold in the Maryland market. The state's deregulation plan for BGE cut rates to pre-1993 levels for six years just as energy prices -- particularly natural gas -- began to climb.

Natural gas, which is among the fuels burned to produce power, often sets the clearing price for electricity in the wholesale market. With wholesale prices rising, competitors found it impossible to undercut BGE's capped price.

Now that rate caps are off, retail suppliers should have a better shot at competing. But many say they are still wary of coming to Maryland because regulators and lawmakers keep threatening to change the rules in response to recent price increases. Any money spent on attracting customers could end up wasted if lawmakers implement some sort of re-regulation plan, they argue.

Consumer advocates see no reason to keep waiting. They want to focus on how to make BGE's electricity cheaper today, rather than clinging to the dream that retail competitors will deliver savings down the road.

"I just don't see people finding a lot of attractive offers out there, and it begs the question of what's the point of all this if these are the types of offers you're getting?" asked Theresa Czarski of the Maryland Office of the People's Counsel, which represents utility customers before the PSC.

The people's counsel wants to dump the procedure BGE and other utilities use to buy power in favor of one that is designed to take advantage of changing market conditions.

BGE view

BGE has said it is open to regulators making changes in the system. The utility does not profit from the power it delivers to customers. Its revenue comes from a fee it charges for delivery. However, Constellation Energy Group, BGE's unregulated corporate owner, profits from the electricity it produces and sells to BGE and other utilities at marked-up prices.

Currently, BGE buys power from Constellation and other wholesale suppliers through multiyear contracts, which are awarded to the lowest bidder through auctions that occur on specified days.

Critics say the flaws of this system were on display in the winter of 2005-2006, when BGE was required to conduct its first free-market-based power purchases as part of the move to deregulation.

The bidding took place just as electricity and other energy prices were gyrating in the wake of Hurricanes Katrina and Rita, which damaged oil and natural gas production in the Gulf of Mexico.

To mitigate future volatility, the people's counsel says BGE and others should construct a portfolio of short, medium and long-term power supply contracts that would be negotiated and actively managed to come up with the cheapest mix.

The power portfolio manager would act much like a mutual fund manager, who seeks out buying opportunities to arrive at a mix of stocks and bonds that will result in the best return for investors. The PSC says it will study the idea along with other regulatory reforms, including some form of re-regulation.

But retail suppliers say they can do it better, and will prove it if regulators give them favorable ground rules in which to work.

Mix of products

Packaging power in innovative ways to come up with the best price is what retailers do every day, they argue. Each competitor has its own mix of products, giving customers a multitude of options, rather than the one-size-fits-all approach being contemplated by regulators.

For example, some customers might be willing to pay more to get so-called "green" power, which is derived from alternative energy sources such as wind and solar.

Others might want to lock in a fixed price for up to five years, giving them long-term certainty with respect to their monthly bills. Still others might want to let their price float with the market -- a riskier bet that could result in a better deal if prices fall over time.

"If competition can get a foothold, it will keep downward pressure on prices," said Rathvon, the Reliant Energy Solutions executive.

Retail suppliers want BGE's power purchases to be more closely tied to current market conditions, which would mean electric rates would fluctuate more frequently. Such a scenario could lead to more ups and downs in BGE bills, but would make it that much easier for retail suppliers to make consumers a better offer, some argue.

Others disagree, saying the state is right to try redesigning the way utilities buy power, rather than pursuing a policy that fosters competition just for competition's sake.

"Because you know most customers aren't going to shop around anyhow," said Kenneth Rose, an industry consultant in Columbus, Ohio.

Larsen, the PSC chairman, concedes that pursuing a "managed portfolio" approach may make it harder for retail competition to take hold. But he said there is little tolerance for making consumers pay higher prices while they wait for competition to come up with cheaper solutions.

And not everyone agrees that the PSC's approach will make life difficult for retail competitors to capture Maryland customers. Some say it will simply force retailers to be more creative, resulting in lower prices and proving that market proponents were right all along.

Skip Trimble, a senior energy consultant with Baltimore-based South River Consulting, said competition can thrive regardless of whether the PSC changes the way utilities buy power. The best competitors will still be able to beat BGE's "managed portfolio" price if they work hard enough, he said.

"If the commission and legislature takes a stand ... within a year the market will follow and be very supportive and very robust," he said. "I guarantee there will be a lot of competition and prices will come down."

paul.adams@baltsun.com

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