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Correction to This Article
A previous version of this article did not make clear that under a hybrid system of regulation in Virginia, Dominion Virginia Power retains ownership of its generation plants and distribution lines. Dominion says it has added 1,450 megawatts of capacity in Northern Virginia since 1999. The company's residential rates have increased 4.5 percent since 1993 and are now under caps that will be removed at the end of 2008. Also, the article inaccurately reported the date that a new regulatory law took effect in Virginia. It was July 1, 2007. Also, the article did not make it clear how a spike in electricity prices on Aug. 1, 2006, affected Pepco. Pepco did not buy electricity directly in the spot market; spikes in power prices are factored into what the utility pays for power in long-term contracts.
Decade of Deregulation Felt in Climbing Bills

By Lisa Rein
Washington Post Staff Writer
Friday, April 18, 2008

As they watch their bills climb, electricity customers in the Washington region might be surprised to know they are paying costs that have nothing to do with the rising price of fuel.

Virginians are paying Dominion Power tens of millions of dollars a year for a nuclear plant the company planned in the 1980s but never built.

More than 1 million residents of the Washington-Baltimore area paid $920 million to take the Calvert Cliffs nuclear plant -- now owned by shareholders of Constellation Energy Group -- off-line in 2034 before state lawmakers agreed to a deal this month requiring the company to take over the federally mandated decommissioning costs.

Maryland customers also paid almost $1 billion to reimburse power companies for constructing plants. Today, thousands of Virginians are still paying these charges, regulators say, although the plants' value has soared.

These costs were added to residential customers' bills under deals struck by lawmakers almost a decade ago when the region's electricity markets were opened to competition.

Federal rules that accompanied deregulation also increase costs to consumers. Because of them, customers pay a premium for living in a congested region thirsty for power. And although they began paying surcharges last year so power companies will invest in new plants, the charges have resulted in relatively few additional megawatts. These charges account for about 25 percent of the price of electricity in the District and Maryland and less in Virginia.

Outraged consumer advocates and politicians say they didn't expect the little-understood costs that came with deregulation and that are driving up bills to record levels.

"I have not a scintilla of regulatory control over two-thirds of the electricity bill," said Elizabeth Noel, the people's counsel and legal advocate for utility customers in the District.

The deal reached between Constellation and Maryland Gov. Martin O'Malley (D) this month blunted two years of recrimination over a 72 percent rate increase for 1.1 million Baltimore Gas and Electric customers. They will get a $170 one-time credit and relief from future decommissioning costs. But as lawmakers adjourned their session in Annapolis, many said their constituents will still pay prices they did not think would be possible in a competitive market.

The average home in Montgomery and Prince George's counties will pay Pepco $1,910 a year starting in June, almost 80 percent more than in 2004.

Power companies say they're operating under fair deals agreed to by regulators, lawmakers and advocates when Maryland, the District and, to a lesser extent, Virginia deregulated the industry. They also say it's only a matter of time before they add capacity.

"The markets are producing competitive results and improving the reliability of the system," said Glen Thomas, president of a group of mid-Atlantic power plant owners.

'Stranded Costs'

Utility companies used to own the generation plants and the wires that deliver power to homes and businesses. In the deregulated system, outside buyers or unregulated affiliates of the utilities took the plants over.

Power companies said competition would cost them customers and the steady stream of revenue needed to recover their investments in plants.

In response, lawmakers and utility regulators allowed power companies to charge ratepayers for those "stranded costs." In Maryland, Constellation, the parent of BGE, billed customers $975 million from 2000 to 2006, even though BGE had merely transferred its 11 plants to Constellation.

Pepco ratepayers in the District and the Maryland suburbs fared better, getting a $72 credit on their bills from the utility's sale of its four largest generating plants to Atlanta-based Mirant for $2.9 billion.

In Virginia, Dominion customers, including 700,000 in the Washington suburbs, have paid the state's largest power company more than $1.5 billion since 1998 to cover the loss of potential customers, according to regulatory filings and the attorney general's office. But the utility didn't lose customers because retail competition never developed. Last year, the General Assembly returned the state to a new form of regulation, which will take effect in January.

The charges include $238 million for a new nuclear reactor at its plant outside Richmond. Dominion canceled plans to build the plant 26 years ago amid safety concerns about nuclear power. The last of the charges was set to expire in 1999. But when rates were frozen during the transition to deregulation, the charges stayed. They'll continue until at least next year.

Electricity charges in Virginia are the lowest in the region because of rate freezing that will be removed next year. But critics say they could be lower still. As Dominion's returns on equity have climbed since 1998 -- hitting 22 percent in a recent year -- and its stock price has almost doubled, the company has not been forced to reduce rates.

"The theory was that at the end of the transition period [to competition], we would have the opportunity to be compensated for costs on our plants," Dominion spokesman Jim Norvelle said. "That's what the agreement said: If you can operate more efficiently, you can keep the savings."

The State Corporation Commission, however, reported year after year that Dominion wasn't suffering any losses in customers from deregulation.

"The utilities never experienced any costs [from competition], but consumers are paying for them anyway," said Irene Leech, an advocate for Virginia electricity customers.

Constellation spokesman Robert Gould said the costs to Maryland customers to decommission Calvert Cliffs and pay off the mortgages on power plants were fair, were openly negotiated and came in exchange for a six-year rate freeze. He said the company is spending $1 billion on plant improvements, partly to meet new environmental mandates.

Even as they voted for the settlement with Constellation that removed the decommissioning costs for customers, Maryland lawmakers promised to come back next year with bills to return the state to regulation.

"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.

Demand and Capacity

Since deregulation, new residents and energy-consuming gadgets have pushed up the region's demand for power. A report by Maryland regulators last year predicted brownouts by 2011 if more plants aren't built.

But little capacity has been added. Environmental costs and public opposition have hindered the construction of plants, especially for companies trying to compete with the owners of plants whose value has skyrocketed.

So federal regulators agreed last year to allow the mid-Atlantic power industry to collect a surcharge to generate new supply.

Maryland regulators estimate that these "capacity" charges, passed on to customers, will add $300 million to bills this year.

"The only tool we have is to provide a financial incentive to build," PJM's Dotter said. "Older plants are shutting down, and there's nothing replacing them."

Critics say the supply has increased so little because the existing system not only benefits the companies in the region, it gives them an incentive to constrain the supply of electricity to keep prices high: Shareholders get the capacity payments even if they build nothing.

"It's money in the pocket of the generating companies without a guarantee that they are going to build," said Paula Carmody, director of the Maryland Office of the People's Counsel. "From a consumer perspective, it doesn't seem terribly beneficial."

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