Va. Takes Heed of Md.'s Electric Rate Backlash

By Jerry Knight
Monday, April 10, 2006

While Maryland politicians and Constellation Energy Group Inc. executives muck around in the mess they've made of electric rates, Wall Street is looking across the Potomac and worrying that something similar could happen in the Old Dominion.

Just as in Maryland, Virginia politicians and utility executives made a deregulation deal with the devil (in this case, the devils being themselves).

In return for getting the government out of the business of setting electric bills, power companies and pols in both states agreed to freeze rates for several years and then to set rates based on the wholesale cost of electricity or the cost of fuel for producing power.

The freeze is about to thaw in Maryland -- and that threatened an overnight rate hike of as much as 72 percent for residential customers of Constellation's Baltimore Gas and Electric Co. and a 38 percent increase for those served by Pepco.

Lawmakers, utility lobbyists and Maryland Gov. Robert L. Ehrlich Jr. (R) spent the weekend trying to find a way to hold down electric bills lest they fry every politician within range.

Free-floating rates won't come to Virginia until 2011, but fallout from Maryland is already drifting across the Potomac.

Credit Suisse analyst Dan Eggers warned last week of "political winds blowing south."

"The political backlash and utility commission bashing in Maryland has apparently caught the attention of the Virginia commission" that regulates utilities, he wrote.

The Virginia State Corporation Commission has told Dominion Virginia Power to get to work now figuring out how much rates will have to be increased to account for rising fuel costs. Under Virginia's electricity deregulation law, the power companies are entitled to a "fuel cost adjustment" in summer 2007.

On Friday, Virginia Gov. Timothy M. Kaine (D) heeded the warning from Maryland. He proposed changing his state's law to adjust customers' bills for fuel costs every year rather than just once in 2007 and not again until 2011.

Annual adjustments could minimize rate shocks like the one that snuck up on Maryland consumers, whose rates have been frozen since 1999. Between 1999 and 2005, Pepco officials point out, the price of coal climbed 150 percent, oil prices rose 300 percent and natural gas costs jumped 400 percent.

The gas price increase is particularly important because back when gas was cheap, utility companies calculated that the most efficient way to generate more power was to build small plants powered by natural gas. The economics of that equation don't work at today's gas prices.

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