Electricity Deregulation: High Cost, Unmet Promises

Retirees Don and Helen Dunn fear that rising electricity costs and higher property taxes could force them out of their Ellicott City home. (Photos By Ricky Carioti -- The Washington Post)

"We were sold a myth called competition," said Del. Patrick L. McDonough (R-Baltimore County). "We will find Jimmy Hoffa in Maryland before we find competition."

Kenneth J. Schrad, a spokesman for the Virginia State Corporation Commission, said the main guarantee of Virginia's deregulation was that its 3.2 million customers would be able to choose their own power suppliers.

"But that doesn't mean much because there isn't anybody to choose," Schrad said. Out of the entire state, only 1,450 customers have switched to a new provider since deregulation -- and they actually switched to a more expensive supplier only because it is environmentally friendly, Schrad said.

Another promise was that suppliers, freed from state regulation, would sell their power to the highest bidder, creating market incentives for increased efficiency and investment in new technologies. But since 1999, older, less-efficient plants have remained profitable, discouraging investment in new plants. The Mid-Atlantic region still has a shortage of capacity, and during much of the year must import energy from outside the area, often at high prices.

Deregulation was also supposed to encourage development of a national grid system. Utilities and their would-be competitors could buy from the lowest-cost producer, no matter where the producer resided. Pepco could, in theory, buy power from a plant in Oklahoma using cheap natural gas. But the national grid hasn't been improved because power producers -- the most logical source of capital to improve the system -- don't want the competition a robust national grid would allow. Today it is nearly impossible to move large amounts of electricity over long distances.

The Virginia General Assembly, getting nervous in 2004 over the lack of competition, extended the rate caps on Dominion Virginia Power -- which serves Northern Virginia -- until Dec. 31, 2010. Prices can be adjusted for rising fuel costs, though, in 2007, and analysts expect that to boost residential rates dramatically.

Under the regulated system, the power company owned both the power plants and the wires used to deliver the power. Seven years ago, regulators in Maryland, the District and Virginia effectively gave up control over the plants, handing that market power over to unregulated generating companies that were free to charge whatever they could.

Pepco sold all four of its power plants in the region in 2001 and became only a distribution company. While Constellation retained its power plants, it separated them for legal purposes from BGE, which now buys its power not only from Constellation but also from other producers. In Virginia, Dominion operates in the same way as Constellation.

Under this system, said Schrad and Rose, low-cost coal-fired and nuclear plants are able to sell power at the same price as much more expensive natural-gas-fired plants. The primary beneficiaries are, like Constellation, owners of coal and nuclear units.

Noel, the D.C. people's counsel, said lawmakers had assumed that energy companies such as Enron would be slashing prices to enter new markets, but after Enron and other energy companies collapsed, no one was interested in local energy markets .

"We opened the doors, and no one was there," she said.

Constellation has become one of the country's leading independent energy suppliers and marketers. Its Commodities Group buys and sells electricity and natural gas and is now the largest electricity broker in the country. It advises more than 10,000 companies on how to best use energy, including how and where to buy it. It owns 107 power plants at 34 locations in California, Illinois and Maryland..

With higher prices, more competition could still emerge. Last week, Washington Gas Energy Services Inc., a sister company to the District-based Washington Gas Light Co., began offering a 10 percent discount off BGE rates to Maryland customers.

Once deregulated, Rose said, it is nearly impossible for Maryland or other states to retreat.

"It's really just bad luck," Rose said. "A lot of these rate caps are coming off at a time when gas prices are sky high. While this does raise questions about the design of the wholesale market, there's actually very little any one can do about it at this point."

Staff researcher Bobbye Pratt contributed to this story.