Decade of Deregulation Felt in Climbing Bills

Users paid millions to decommission Calvert Cliffs in 2034 before the owner was required to assume the costs. (1998 Photo By Mark Gail -- The Washington Post)
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"If you have constrained supply, rising demand and no regulation, you're going to have windfall profits for power companies and high rates for customers," said Sen. James C. Rosapepe (D-Anne Arundel), who led dramatic but unsuccessful efforts on his chamber's floor to require that new power supplies be regulated and sold first in Maryland.

The Market

Pepco and BGE shop for power in a wholesale market in which unregulated generation companies, including Constellation, Mirant and, to a lesser extent, Dominion, are free to charge what the market will bear. Electric bills in Virginia are expected to climb when the state returns to regulation next year, although it's unclear by how much.

Prices are set in complicated auctions for power in which suppliers bid to provide electricity that utility customers will need over a year, several months or the next day. The system works like the stock market, with one exception: Utilities, which buy the power, need to keep the lights on.

In the old system, prices were based on what it cost a coal, nuclear or natural gas plant to produce electricity. Now, on hot summer days, for example, when the demand for electricity is high, the price is set by the last, most expensive plant that is needed to supply power. These are typically natural gas plants. But the rising price of natural gas has produced a windfall for owners of older nuclear and coal plants. They produce power more cheaply and can sell it at the same rate as natural gas plants, which run only when demand is high.

In the Washington suburbs, these congestion costs have soared. The price of a megawatt of power bought by Pepco two summers ago spiked from $39 at 1 a.m. on Aug. 1 to $813 at 2 p.m., according to price data collected by PJM Interconnection, the operator of the mid-Atlantic power grid.

In the old system, the price on such a hot day would have been averaged with what it cost to serve all Pepco customers, not what suppliers of power bid, said Ken Rose, an independent energy consultant.

PJM spokesman Ray Dotter said the Aug. 1 price reflected the cost to produce electricity that day. But customers pay a flat rate, giving them little reason to use less power, he said. "A more ideal situation would be that the price sends a signal that people conserve more."

Thomas, of the P3 power group, said one of the biggest factors driving up prices in Washington is the congested transmission grid. With no new lines to move electricity from distant cheap plants to the region, utilities often must fire up costly natural gas plants.

Maryland regulators estimate that congestion charges added $500 million to the cost of electricity in 2006.

The rules were set by the Federal Energy Regulatory Commission as wholesale market prices replaced regulation.

Maryland, the District, Virginia and other jurisdictions in the grid have filed complaints with FERC, saying that the system allows power companies to overcharge in the wholesale market and that oversight was muddled. Commission officials say they can't comment on pending cases.

Congestion charges have played a major role in the rising value of power plants under the deregulated system: Owners of older plants that produce electricity cheaply are cashing in. Mirant and Constellation, which own 85 percent of the generating capacity in the District and Maryland, are worth $18 billion to $24 billion, according to a report by a consultant for the Public Service Commission.