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Fixing Maryland's electricity problem

Originally published in the Baltimore Examiner

Economic & Fiscal Policy

by Thomas A. Firey

OP-EDS

JUNE 15, 2006 Bookmark and Share

BALTIMORE - How many Maryland lawmakers does it take to fix a light bulb?

Far more than it takes to break it, unfortunately.

The message to state lawmakers who are trying to “fix” Maryland’s supposedly failed electricity deregulation: It’s far easier to make matters worse than to get things right.

Press accounts of Maryland’s 1999 deregulation illuminate two important facts:

» A handful of lawmakers, working in relative seclusion, crafted the 73-page bill that the leadership pushed through the General Assembly at the speed of light.

» Though the bill passed by a 95-34 margin in the House and 34-13 in the Senate, its contents left most lawmakers in the dark.

Many lawmakers who voted for the bill did so to guarantee low prices. But more competitive markets do not guarantee low prices — they only guarantee that prices more accurately reflect costs. Over time and all things equal, that should push prices down as suppliers compete over price, consumers moderate their usage and innovators offer alternatives. But, if all things are not equal and there is some problem with supply or demand, markets will signal the problem with higher prices.

For the past several years, there have been several problems with electricity markets, nationally and in Maryland. Natural gas-fueled electricity, the once (and probably future) most cost-effective source of new power, has skyrocketed in price as North American gas supplies have been stretched to their limits and the U.S. has failed to tap into cheaper global supplies.

Clean air regulations have raised the price on new sources of coal generation, benefiting human health and the environment but hurting wallets. Nuclear power continues to be an economically and environmentally questionable source of electricity. And the alternative power sources that were once idealistically envisioned have largely turned out to be alternatives to having electricity.

Yet those problems, and market signals, were hidden under rate caps implemented by the General Assembly and Public Service Commission in 1999. With the caps now about to expire, those signals will soon shine out before the public — unless lawmakers find some way to shade us from reality.

Should they do this? Market signals can be painful, but they also provide the right incentives to suppliers, consumers and innovators. That’s preferable to when regulators have been required to protect monopoly utilities’ bottom lines in Maryland and other states. They encouraged producers to over-build their generation and consumers to over-consume electricity. The result was high Maryland electricity prices under regulation and the threat of industrial consumer flight to cheaper states.

None of this is to say that Maryland’s electricity deregulation was well designed. PSC rules governing the new market structure’s auction process are utterly indefensible — mandating a short, limited auction for lengthy contracts. The state requirement that power companies sell off their generators was unnecessary and created the market-artificial entity of a power company that doesn’t generate power.

The state’s decision to award Baltimore Gas and Electric Co. “stranded cost recovery” by surcharging all consumers to pay off the Calvert Cliffs nuclear plant may have been politically necessary to get BGE’s support for deregulation, but it proved financially unjustified. Worst of all, the rate caps, coupled with the stranded cost surcharge, discouraged would-be competitors from entering Maryland.

How should lawmakers fix those problems? Should they revise the current market structure or return to the old, regulated structure and try to fix its perverse incentives?

Lawmakers could start with the following: Master the complexities of electricity markets. Recognize that many of the issues in electricity markets don’t have clear solutions, but instead involve tradeoffs between different costs and benefits. And finally, strive to communicate this information to constituents.

Doing all this won’t magically produce low electricity prices, but it can lead to policy that consumers can live with.

Thomas A. Firey is a Cato Institute regulatory policy scholar and a Maryland Public Policy Institute senior fellow. He can be reached at tfirey@mdpolicy.org. Examiner