Restructuring Today
February 21, 2006

What if frozen rates expire at a bad time?

A Maryland PSC staff plan to phase in market-based rates at Baltimore Gas & Electric would be bad, a BG&E official told regulators.

          The utility's six-year rate freeze ends this summer with a bigger rate hike than other Maryland utilities experienced when their caps ended.

          Customers have saved more than $1 billion over the six years, a BG&E official said.

          About half of that was saved last year when customers were shielded from serious price spikes.

          The freeze at below-market prices is the reason for this summer's impending rate shock, he explained. 

          The rate jump is big enough that Gov Robert Ehrlich, R, told the PSC to ease it in gradually (RT, 1/9). 

          Then the PSC asked its staff to come up with a plan that doesn't distort market signals or impede development of competitive markets (RT, 1/13).

          The staff would give customers the option of paying lower than market rates for nine months then paying higher rates plus interest until they catch up in the summer of 2008 (RT, 1/27).

          But BG&E has "very serious concerns" about the staff plan, Mark Case, vice president for business performance, strategy and regulatory services, responded.

          That approach would be bad for customers, bad for the utility and bad public policy, he wrote.

          Customers build up the equivalent of a large credit card balance that they have to pay off along with finance charges -- perhaps at a time when energy prices are high, he warned.

          Customers get too-low price signals for nine months that discourage conservation and efficiency, he observed.

          Then their price signals are too high as they pay off built-up debt, Case explained.

          The utility has to finance payment deferrals -- hundreds of millions of dollars worth -- and suffers a reduced cash flow, poorer interest coverage ratios and possibly damage to its credit rating, he said.

          The payment deferral that the staff proposed is double BG&E's yearly earnings from distribution, he said, just to give an idea of its scale.

          Case called the plan expensive to implement.

          He cited the time and cost for reprogramming the billing systems and polling customers on whether they want to opt in.

          Generation rates are rising everywhere, Case added, pointing to rates as high or much higher than the 10.5/kwh where PSC staff estimates BG&E's new rates to be.

          Layering deferral costs on top of higher rates makes the problem worse.

          Marketers have made "significant investments" since they expected BG&E's market to open this summer, NEMA President Craig Goodman pointed out in his testimony.

          But "continued uncertainty" about how the PSC will act may raise costs and risks for marketers interested in selling to BG&E's small customers, thus delaying their market entry, Goodman warned.

          Goodman considers the staff plan to be well-structured and a relative rarity -- a market intervention that's equitable and efficient.

          This would be a good time, Goodman added, to make improvements in BG&E's market to promote competition, such as:

            Buying marketers' receivables if they use consolidated customer billing;

            Setting up a competitively neutral customer education program;

            Creating a pro-competition division at the PSC similar to the New York PSC's Office of Retail Market Development;

            Requiring utilities to provide marketers with low-cost customer lists with use and billing information;

            Eliminating costly delays and risks created by uncertainty about laws, regulations and public policy moves, and

            Letting the competitive market redesign BG&E's billing system if the utility can't do it in time to activate the staff plan.

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