Maryland Reconsiders Electricity Deregulation

A cornerstone of the Enron-inspired electricity restructuring plans adopted in about 15 states was to require traditional vertically integrated utilities to sell their power plants to "merchant power" utilities who would compete in a wholesale market. The old utilities and new retail "energy services companies" would buy the electricity generation portion of service at wholesale and resell it to retail customers. The incentive for the old utilities was to form holding companies with Enron-like affilates in other lines of business, for example, wholesale power generation in other states and countries, wholesale energy trading, retail middlemen, broadband communications, and acquisition of other utilities through mergers.

Except for New York, legislatures in all the other states that "restructured" passed laws requiring the traditional utilities to sell their power plants and forbidding them from re-entering the power generation business, except through holding company affiliates.

Maryland is now rethinking its path to deregulation and higher prices, and is considering new legislation to allow utilities to build cost effective power plants. According to Electric Power Daily:

A hearing is scheduled today on a bill introduced by Maryland's most vocal opponents of the deregulation of electricity markets, who will release a study that shows ratepayers could save a significant amount if utilities build new natural gas-fired plants. The bill, S.B. 807, directs the Public Service Commission to develop a plan for utilities to build and own new, regulated electric generation. The legislation is meant to reinforce Governor Martin O'Malley's December 2009 letter to the PSC urging the regulators to use their existing authority to direct utilities to build new plants, Senators Jim Rosapepe and E.J. Pipkin, said in a statement.

The study by the Maryland Tax Education Foundation shows that Baltimore Gas and Electric and Pepco . Jeff Hooke, managing director of Hooke Associates, and chairman of the board of the Maryland Tax Education Foundation, said Monday in an interview.

Hooke said BGE and Pepco, both distribution companies, are paying an average of $109/MWh for power. But he found that the utilities could generate the power themselves for about $60/MWh, assuming the price of natural gas is$5.50/Mcf.

Hooke researched the cost of building and operating anew combined cycle gas-fired plant, including the cost of the turbines. Hooke built a 15% return on equity into his evaluation and a 5% interest on debt, he said.

“The profit margins of merchant power producers are quite high,” Hooke said, noting their unleveraged return on assets is more than 20%. Hooke was an investment banker for25 years and now runs a consulting firm and said he is not opposed to companies making a profit. “But the beleaguered customers of the utilities are sending large profits to these merchant companies,” he said.

Mary Powers, Platt's Electric Power Daily, March 9, 2010. A summary of the report of the Maryland Tax Education Foundation is here.

In New York, the PSC worked with the utilities to restructure voluntarily and without legislation, making deals providing for the sale of power plants, giving utilities their wish to establish new holding companies and allowing recovery of "stranded" costs. Although other states are readjusting their paradigms in light of bitter experience with higher prices after restructuring, the New York PSC remains wedded to the Enron-inspired plan and its heavy reliance on NYISO spot market pricing. For example, the PSC insisted, as a condition of the sale of Energy East to Iberdrola, that RG&E sell more of its power plants to merchant power companies. Before restructuring, RG&E prices were on a par with Niagara Mohawk's and were above Central Hudson's. While other utilities followed the PSC prescription, and their prices rose, RG&E became the lowest price investor-owned electric utility in the state, probably because its energy charges were based more on RG&E's cost of production and less upon market-based rates.