It’s not at all surprising to see lobbyists for utility companies supporting a bill in Annapolis that the Office of the People’s Counsel, a state agency that protects consumer interests, opposes. But when all five members of the Public Service Commission show up to testify against the bill, it’s time to take notice. That’s what happened with House Bill 653, legislation that rocketed its way through the Economic Matters Committee and through the full House on Saturday. It represents a paradigm shift in how Maryland sets gas and electricity rates, and members of the PSC say the legislature is moving way too fast. They’re absolutely right.
Utility regulation is a complex business. Its essential principle is that since companies like BGE and Pepco have government-sanctioned monopolies over their service areas, the state retains the power to regulate the rates they charge in a manner to cover costs and allow for a reasonable rate of return. Traditionally, Maryland regulators have done that by looking at historical data related to actual expenses and justifiable investments, making some adjustments as necessary based on forecasts of business conditions and approving, modifying or denying requested rate increases. HB 653 would require the PSC to use alternative methods to calculate rates if a utility requests it, such as using forecasts of costs and investments from a future “test year” or “formula rates” that are automatically adjusted based on pre-determined factors, subject to later reconciliation.
The benefit from the utilities’ point of view is obvious. These alternative methods reduce some of the risks they face related to uncertainty. In their testimony to Economic Matters, utility lobbyists argued that it’s good for consumers, too, in that it would increase the companies’ ability to make investments in system modernization efforts that would increase reliability and resiliency to extreme weather and cyber attacks, and would facilitate the adoption of green energy. They stress that the legislation would not eliminate public notice requirements or the ability of interested parties to intervene in rate cases. Finally — and they made this point over and over again — some 39 other states use one or more of these alternative rate-setting methods.
But the PSC and People’s Counsel make a much more compelling case to vote this bill down. First, it is unnecessary. The PSC already has the authority to use alternative methods in its rate-setting cases where it makes sense, and it isn’t hostile to the idea. It has used some of these techniques in limited ways and has set a conference at the end of next month to get input from the public and stakeholders on how and when to use them. Second, the expertise necessary to handle rate-setting in this way is different from what the PSC (and, for that matter, the People’s Counsel) are equipped with now. It would require hiring new staff and undergoing a learning curve to do properly. Third, Maryland has shown some flexibility in terms of accelerating investments to improve reliability during the last decade, and its overall grid modernization efforts in terms of policies and investments rank among the best in the nation. And finally, while most states use some alternative forms of rate-setting, that doesn’t mean they have all adopted a particular policy that Maryland is rejecting. Rather, they employ a wide variety of practices, some good, some bad from a consumer’s perspective, all of which offer lessons for Maryland.
Years ago, state lawmakers welcomed an influx of energy companies believing that opening up utility monopolies to competition would drive down prices. But for most residents who have signed up for those deals, energy costs have not fallen.
And that’s the strongest reason to take some time with this. PSC Chairman Jason M. Stanek cautioned legislators that the bill has “far-reaching and uncertain implications” that should be carefully considered before moving forward. And remember, this is not the Martin O’Malley PSC, installed after the 2006 BGE rate increase debacle to rein in the utilities. These are appointees of Gov. Larry Hogan, and if they believe this legislation is “putting the cart before the horse,” in the words of Commissioner Anthony O’Donnell, the former Republican leader in the House of Delegates and a former long-time utility industry employee, we should listen to them.
We aren’t inherently opposed to alternative methods of rate setting. They may well be more appropriate in some circumstances. But given how important fair and transparent regulation of utility rates is to consumers and the companies alike, we shouldn't rush into this. Let the PSC get input on these alternatives, let it study other states’ experiences, and let’s make sure that whatever we do benefits the state as a whole, not just the utilities.