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O'Malley questions rate fairness

The Baltimore Sun

Gov. Martin O'Malley asked the Public Service Commission yesterday to investigate whether the wholesale rates for electricity in Maryland exceed federal standards for reasonableness, echoing an action in Illinois that helped lead to a $1 billion rate rebate for customers there.

O'Malley said in his letter to PSC Chairman Steven B. Larsen that it is not enough for the state's utilities to show that they followed Maryland's regulatory procedures when they participated in auctions for power supplies. Federal law also requires that the wholesale prices they pay - and pass on to customers - must be "just and reasonable," he wrote.

"The State of Illinois has filed a complaint with the Federal Energy Regulatory Commission (FERC) charging that FERC failed to exercise its duty to determine whether the wholesale prices procured by servicing utilities to provide standard offer service in that state were 'just and reasonable,'" O'Malley wrote. "Maryland needs to know whether a comparable cause of action exists here."

O'Malley, a Democrat, campaigned on a pledge to roll back steep rate increases proposed by Baltimore Gas and Electric Co. But his appointees to the PSC ruled in May that the commission had no cause to deny a 50 percent electricity rate increase for BGE's 1.1 million customers in Central Maryland, noting that the company had followed the auction procedures set up by their predecessors.

O'Malley responded by urging the PSC to investigate possible conflicts of interest between BGE and its parent company, Constellation Energy Group. Larsen, an O'Malley appointee, issued subpoenas to the companies on Wednesday to assist in that investigation.

Larsen said the PSC's May ruling on BGE rates also raised questions about whether an Illinois-style complaint would be appropriate in Maryland.

"We have already made a request ... for assistance in evaluating the competitiveness of the wholesale market, and certainly with the governor's letter we will take a more directed and immediate examination of the issue," Larsen said.

Wholesale energy sales fall under FERC jurisdiction, which could put the commission on a collision course with federal regulators responsible for ensuring that the markets are fair.

In Illinois, where the end of rate caps last year led to increases in electricity prices that were as high as or higher than those for Maryland consumers, Attorney General Lisa Madigan filed a complaint with the FERC in March alleging price manipulation by energy suppliers. Her complaint relied on a study by Argonne National Laboratory and the University of Illinois that showed the wholesale prices consumers were paying for electricity were in some cases double the costs to produce it.

"Wholesale electric rates are supposed to be just and reasonable, and ... [federal courts] have ruled that in order to decide whether rates are just and reasonable in the electric context, you need to look at the cost of producing the electricity," said Ben Weinberg, public interest division chief of the Illinois attorney general's office. "The wholesale rates that were procured in the reverse auction were not justifiable and therefore should be rejected by the FERC."

While Madigan pursued her complaint, Illinois legislators considered regulatory actions and taxes that would have hurt the utility industry, and, under pressure, the major power companies in the state agreed this week to a $1 billion rate relief plan.

If approved by the state's legislature and governor, utilities would provide rebates to customers that will reduce but not eliminate increased power costs.

As part of the deal, Madigan will drop her FERC complaint. The proposal also calls for creating a state agency that would negotiate with power suppliers to buy electricity for consumers at the lowest price.

Robert McCullough, an energy consultant who advised the Illinois attorney general on its FERC complaint, said the Maryland and Illinois situations have parallels. Both states required utilities to give up ownership of their power plants as part of the move toward deregulation. Instead, utilities buy electricity from wholesale suppliers through competitive bidding that awards contracts to the lowest bidder.

But in both states, McCullough found, the prices utilities received through energy auctions were higher than prices available in the broader wholesale market at the time of bidding.

In Illinois, the difference was 40 percent, which he said suggests that utilities overpaid for their power. In Maryland, McCullough said, the difference was about 20 percent. His analysis of Maryland energy auction results was first reported by The Sun in April.

McCullough said the problem with the way utilities buy power in Maryland and Illinois is that the process is too secretive.

"The problem is these auctions are very, very opaque, they're complicated, have a small number of players, and the rules are secret," he said. "They simply are an area where you have to fear abuse if the numbers don't pencil out correctly."

Industry officials dispute McCullough's claims, saying there are legitimate reasons that the auction results in Illinois seemed out of step with the rest of the wholesale market. Bidders in state-run auctions must factor in risks and other premiums that add to the price utilities receive, they argue.

In Maryland, the PSC's own outside consultants concluded the state's bidding process was competitive and fair - and that the results were in line with what could be expected given market conditions.

Robert Burns, a senior research specialist at the National Regulatory Research Institute at Ohio State University, said the commission should investigate further. But if the investigation leads to a FERC complaint, convincing the federal agency that the wholesale market is broken could prove difficult, he said.

PJM Interconnection, which runs the power grid and wholesale market for Maryland and 12 other states, is widely regarded as having the best-run energy market in the nation.

"This is a huge thing to try to prove, because PJM is one of the regional transmission markets that FERC points to as being a model," he said.

Sen. E.J. Pipkin, an Eastern Shore Republican who helped lead the General Assembly's negotiations with BGE last year, said the governor should press the issue. He said the state's energy bidding process has resulted in Maryland consumers paying among the highest wholesale rates for power even though much of it is produced cheaply at coal and nuclear plants.

"The wholesale markets in the PJM grid in our part of the country are nothing more than price-fixing mechanisms," Pipkin said. "If FERC investigates and finds these wholesale markets are uncompetitive, it's game, set, match; we must re-regulate."

Part of the PSC's investigation will delve into whether wholesale energy suppliers such as Constellation are making an unreasonable profit from electricity sales to BGE and other investor-owned utilities in Maryland.

But Thomas A. Firey, editor of Regulation magazine, a publication of the Libertarian-oriented Cato Institute, said it's often possible for companies to make unusually high profits in the early stages of a new market. That's only a problem if competitors don't jump in and drive prices down, he said.

Firey noted the announcement this week by Silver Spring-based Competitive Power Ventures that it plans to build a gas-fired power plant in Charles County, as well as building new transmission lines in the state, as evidence that the market may sort itself out.

"That's a great sign, and hopefully we'll be hearing more such stories," Firey said. "But are we willing to wait three or four years for this natural gas plant to open up? Are we willing to wait 10 years for these power lines to come in? That's a short time for markets. It's a long time for consumers."

andy.green@baltsun.com paul.adams@baltsun.com

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