The Baltimore Sun

Consumers in Maryland and 12 other states will overpay for electricity by an estimated $12 billion during the next few years because market rules to spur construction of power plants are instead enriching energy companies, state utility regulators said in a complaint yesterday.

The state Public Service Commission joined a coalition of regulators and power buyers throughout the Mid-Atlantic power grid asking federal regulators to refund the excess payments, which it says have resulted in "unjust" electricity prices.

The group says so-called wholesale "capacity" auctions for electricity generation committed for 2008 to 2011 did nothing but enrich power generators in Maryland and other states, while resulting in little or no new plant construction to help safeguard reliability of the grid.

In a complaint filed with the Federal Energy Regulatory Commission late yesterday, the coalition says regulations establishing the market for electric generation capacity are vulnerable to abuse and manipulation by power generators. That makes it possible for some generators to use their market influence to artificially raise prices, the complaint said.

"If these unreasonable results stand, customers will pay significantly higher capacity charges than justified, but with little discernible benefit, while existing generators will receive an unwarranted windfall," the complaint says.

With the addition of an 8 percent rate increase tomorrow, BGE's Maryland customers will be paying 85 percent more for electricity than before deregulation was passed in 1999. Capacity charges are one component in the price of power that Baltimore Gas and Electric Co. buys for its 1.1 million customers and has contributed to rising prices in recent years.

A spokeswoman for the FERC could not be reached last night.

Steven B. Larsen, PSC chairman, declined to comment, saying the commission and other coalition members will discuss the filing at a briefing Monday.

The complaint was filed against PJM Interconnection, which operates the electric grid and wholesale power market for Maryland, the District of Columbia and 12 other states. A spokesman for PJM could not be reached last night.

A spokesman for Constellation Energy Group, the state's largest power generator, said he had not seen the complaint and could not comment on it. However, the company says the capacity market is helping to spur development of new generation as it was intended. Constellation and other power companies say higher prices are needed to gain financing to pay for the soaring cost of new plants.

"The reason that we have maintained support for [capacity markets] is that the most important thing at its core is to show a price signal which can incent development of new generation in the proper locations," said Lawrence McDonnell, a Constellation spokesman.

The FERC complaint did not say how much of the estimated $12 billion in overcharges will be borne by Maryland consumers. However, some of the highest prices produced in PJM capacity auctions for 2008 to 2011 were in the BGE and Pepco territories. BGE is a Constellation subsidiary.

The complaint is the PSC's latest bid to influence or change federal market rules that it contends unfairly hurt Maryland consumers. The commission largely prevailed in two previous FERC complaints, resulting in changes that could result in small savings for consumers. However, the latest filing has the potential to roll back billions of dollars in power charges, and force changes in how the capacity markets operate.

But the action also carries risks if power companies opt to delay decisions to build new power plants out of concern that regulators might intervene in competitive markets, resulting in financial givebacks after the plant is built.

The battle over market rules is critical to Central Maryland, which suffers from a growing shortage of electricity and congestion over transmission lines. That scarcity results in higher prices for residents in BGE and Pepco territory. State regulators and PJM officials have estimated that Maryland faces potential blackouts as early as 2011 unless new transmission lines or power plants are built to relieve pressure on the grid.

The grid operator determined in 2005 that electricity prices in the region were too low to spur power companies to invest in new plants. PJM designed something called the "reliability pricing model" in hopes of resolving projected energy shortfalls in Maryland and other parts of the regional grid. Part of the plan was to have power generators take part in auctions, in which they would bid the power-generating "capacity" of their plants in return for a price established by the market.

The capacity auctions obligate the bidders to make their generators available to the grid, thus helping to ensure the reliability of the system. If the price is high enough, the theory goes, generators will use the higher payments to invest in new plants where they are needed most.

Because it takes several years to build new power plants or revamp old ones to produce more energy, PJM established a series of "bridge" capacity auctions for generation pledged to be available from now until May 2011. It is those auctions that Maryland regulators and the coalition of power buyers say resulted in prices that were more than 50 percent higher than was warranted.

Energy consulting firm Kaye Scholer estimated that the first four bridge auctions resulted in $26.2 billion in customer costs across the PJM region, which serves more than 51 million customers.

Despite those high prices, the group says, little new generation was bid into the system for those years.

"In effect, therefore, the transitional auction results were no more than an enormous and unwarranted wealth transfer from customers in the PJM region to existing capacity resources," the complaint said, referring to power generators who will receive the payments.

State regulators and critics of the competitive wholesale market blame the capacity auctions for driving prices higher than they would be under traditional regulation.

PJM said two weeks ago that the latest capacity auction, which will be for generation bid for June 2011 to May 2012, provided evidence that the market is beginning to work as intended. Yesterday's FERC complaint pertains to flaws in previous auctions.

However, PJM said the most recent auction yielded capacity prices that were 37 percent lower than the previous auction's results. Also, it resulted in an additional 4,238 megawatts of new power generation and conservation resources pledged for the PJM territory. One megawatt is roughly enough to power 1,000 homes.

"Forward capacity auctions are creating incentives, and the marketplace is responding with investments," said Andrew L. Ott, a PJM senior vice president, in a May 15 statement.

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