Energy Deregulation Comes Home to Roost

"It is very hard to draw everyone into a reasoned and rational debate based on the merits of the situation," said Mayo A. Shattuck III, chief executive of Constellation Energy Group, parent company of Baltimore Gas & Electric. (By Katherine Frey -- The Washington Post)
By Steven Mufson
Washington Post Staff Writer
Tuesday, April 25, 2006

BALTIMORE -- For almost a year, they regularly faced each other across tables set up in concentric squares in a lecture hall at Baltimore Gas & Electric's offices. With hundreds of millions of dollars at stake, dogged negotiators represented more than a dozen groups, including BG&E itself, the state legislature, the Office of the People's Counsel and big electricity customers like Johns Hopkins University and major industries.

Their goal: to deregulate Maryland's utility industry to make it more efficient and competitive. When they reached an agreement on June 29, 1999, they all shook hands and called it a deal.

Some deal. Nearly seven years later, the same groups have been waving fists, not shaking hands, even after the accord to phase in rate increases that Gov. Robert L. Ehrlich Jr. struck on Friday. More than half of Maryland households, including those in Anne Arundel, Howard and part of Prince George's counties, still face sharp hikes in their electricity bills. Maryland politicians, many of whom have received contributions from the utility, face voter ire in an election year.

Even BG&E's parent company, Constellation Energy Group, has been sobered by the political hullabaloo. Sitting in his office last week, with a commanding view of Baltimore's harbor below, Constellation chief executive Mayo A. Shattuck III said that the month of talks with state politicians had been an "emotional roller coaster." He said, "It is very hard to draw everyone into a reasoned and rational debate based on the merits of the situation. There seems to be a large anti-business sentiment that overlays everything."

Other states are bracing for similarly bruising battles and trying to think of ways to avoid them. Virginia, Illinois and Ohio, like Maryland, made deals years ago that froze household electricity rates at levels far below current market rates, but the freezes end soon. In Virginia, a "fuel cost adjustment" will hit consumers next year, and rates will be deregulated starting in 2011.

Homeowners in some states have already taken hits, including hefty rate increases for Pepco customers in Maryland and Delaware and an 80 percent increase for customers of Texas's biggest utility.

"Everyone looks at [Maryland], and it's a frightening prospect," says Martin Cohen, director of consumer affairs for Illinois Gov. Rod Blagojevich (D).

At the center of the Maryland battle is Constellation Energy, one of the nation's 200 biggest public companies and considered by many to be a model for the electric power industry. In seven years, it has remade itself from the parent of a dull, predictable Maryland utility into what it calls an "energy merchant" that has pushed beyond old regulatory boundaries. It has become the country's largest seller of wholesale power, with big commercial customers like Ford, Wal-Mart and Wachovia in more than a dozen states. And it gets power from wide-ranging plants, from California to upstate New York to Texas.

Whereas BG&E was once the center of Constellation, this local utility, which only runs the substations, transmission lines and distribution lines for 10 counties in central Maryland, is now a relatively modest part of the parent company. BG&E gave its 12 power generation plants to other parts of Constellation, which last year earned 71 percent of its profits from the merchant energy business.

If Constellation completes a planned merger with Florida Power & Light Co., it will become the nation's third-largest nuclear operator, second-largest utility and one of its 75 biggest public companies.

But the company's success amid sharp increases in energy prices has focused debate over whether utility deregulation has worked. "We were told that this would benefit consumers. We were lied to. This was always about power companies breaking free from regulation to make much, much more money," said Tyson Slocum, director of the energy program at Public Citizen.

Regulation of the utility industry dates to the Depression. Spurred by financial scandals and the fact that just three holding companies controlled 45 percent of the electric power generated in the United States, Congress adopted the Public Utility Holding Company Act in 1935. To prevent utilities from speculating with ratepayers' money, the act barred utilities from doing business across state lines. The result was localized utilities that did everything from run power plants to bill households, with regulated returns on investments in the country's power infrastructure.

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