Maryland residents could save up to $2 billion in electricity costs if the state prevails in a complaint alleging that power suppliers made windfall profits because of flawed federal regulations, the Public Service Commission said yesterday.
The alleged overcharges amount to an estimated 5 percent to 10 percent of the average bill for customers of Baltimore Gas and Electric Co., which is among the utilities the commission says overpaid for power.
The Maryland People's Counsel estimates that eliminating the charges could save the average Maryland customer $570, or $15.85 a month, through May 2011 if federal officials ordered refunds.
The complaint, filed Friday, pertains to federal regulations to spur construction of new power plants by establishing auctions for power generation capacity. The commission says the so-called capacity auctions didn't result in new power plants being built in Maryland, despite the billions of dollars in higher payments shouldered by consumers.
"We didn't get what we paid for," said PSC Chairman Steven B. Larsen. "The money went to existing generators for essentially showing up."
The PSC is part of a coalition of state utility regulators, large power buyers and consumer advocates in Maryland, New Jersey, Pennsylvania and Delaware who are protesting to the Federal Energy Regulatory Commission.
The group asked FERC to refund excess capacity payments that it calculates at $12 billion for customers within PJM Interconnection, the grid operator for 13 states and the District of Columbia.
The coalition appears to have little chance of getting FERC to order refunds. Industry officials say FERC is typically reluctant to second-guess the market - particularly when none of the participants is alleged to have broken any rules. Rather, it is the rules that Maryland and other states say are broken.
FERC recently declined to order up to $87.5 million in refunds to Maryland consumers after it sided with the PSC on a complaint over a different set of market rules.
In that instance, the PSC complained that federally approved market rules allowed certain power generators to be exempt from price caps at times when nobody was bidding against them. FERC agreed and ordered changes, but it refused to take back what the PSC said were unjust payments.
The mere existence of the complaint could discourage power company executives from considering spending billions of dollars on new plants to meet growing demand in the Mid-Atlantic, representatives of the industry said yesterday.
Power suppliers and investors say they loathe regulatory uncertainty, which they argue makes it harder for them to gauge future profit potential. Businesses factor that uncertainty into decisions about whether to build new power plants and how much to charge for the electricity they sell.
The issue is of special concern in Maryland, which faces an energy shortfall by 2011 unless new transmission or generation is built.
"You need that certainty before you spend a billion dollars [on a plant]," said Glen Thomas, a spokesman for the PJM Power Providers Group, which represents power suppliers in the 13 states served by PJM. "Going back to auctions that have already cleared is a complete disaster because nobody will have any confidence in [the market] going forward."
Maryland and the rest of the coalition said they have heard that argument before. "We can't be held hostage to what we think are inefficient markets," Larsen said.
The complaint by state regulators is against PJM, which operates the wholesale energy market in addition to running the grid. In 2005, PJM determined that the region faced an energy shortfall because electricity prices were too low to spur power companies to build new plants.
PJM decided at that time to establish something called the "reliability pricing model," which, among other things, established the capacity market for generation in hope of boosting construction of new plants.
The idea was to have energy producers bid the power generating capacity of their plants into the market in return for a price determined at auction. Winning bidders are required to make their power plants available to the grid for the "capacity" payments. The hope was that suppliers would use the guarantee of higher payments to build new plants or expand the output of existing ones.
Maryland and other states say the new pricing model netted PJM power suppliers - who supply 51 million customers - $26.2 billion in new payments, including the roughly $2 billion that went to Maryland suppliers.
Constellation Energy Group, BGE's corporate parent, and Mirant Corp. account for about 80 percent of the electricity produced in the state.
Constellation supports PJM's position that capacity markets are working and says power suppliers need higher prices to justify the huge investments they must make.
The cost of building a new power plant has soared in the past few years, making it harder for suppliers to get financing without some assurance that they can recover their costs. The initial capacity auctions - which cover June 2008 to May 2011 - resulted in no new generation being built in Maryland, though there are a number of projects under consideration.
That means existing Maryland power plants will take in an extra $2 billion for doing nothing but continuing to operate, coalition members said yesterday.
"If [that is] not corrected, Maryland residential customers will continue to pay, as part of their electricity bills, for new generating capacity that does not exist," said Paula M. Carmody, Maryland People's Counsel.
Ray Dotter, a PJM spokesman, took issue with claims that the capacity market has failed, saying there is clear evidence that power suppliers are investing in additional generation as a direct result of the higher payments.
Taking those payments back now would create chaos in the market, he contends.
"The [reliability pricing model] auctions are producing the intended results and is sending a price signal that has stimulated investment in generation," he said.
Dotter said PJM is open to making changes in the system for future auctions, so long as the results of previous auctions are left intact. PJM has commissioned a study to review the auction results, and FERC has said previously that it is willing to wait for that process to play out before considering changes, Dotter said.
FERC officials declined to comment on the complaint yesterday. It requested stakeholders in the process to file comments by June 23, a spokeswoman said.
At a glance
What: A coalition has filed a federal complaint against grid operator PJM Interconnection.
Why: The group says certain power market rules are unfair and cost consumers in 13 states $12 billion in excess payments. The group wants federal regulators to order refunds, including up to $2 billion for Maryland consumers.
How utility bills could be affected: If the group prevails, the Maryland Office of People's Counsel estimates a typical Maryland resident could save $570 over three years, or $15.85 a month.
The coalition: Among others, the group includes the Maryland Public Service Commission; Maryland People's Counsel; utility regulators in Pennsylvania, Delaware and New Jersey; consumer advocates in the District of Columbia, Ohio, Pennsylvania and New Jersey; the Southern Maryland Electric Cooperative; Allegheny Electric Cooperative; and the U.S. Department of Defense.
Makeup of PJM: It operates the power grid and wholesale energy market for all or parts of Maryland, Delaware, Illinois, Indiana, Kentucky, Michigan, New Jersey, North Carolina, Ohio, Pennsylvania, Tennessee, Virginia, West Virginia and the District of Columbia.
Its territory has 51 million residents.