Maryland is the one source of energy that costs less today than it did early
in the Clinton administration.
But tomorrow is the beginning of the end for consumers who cherish carefree
hours of watching television, washing dishes or basking in air-conditioned
bliss.
Somewhere in the 15-story East Tower of Charles Center in downtown
Baltimore, brokers for the state’s largest utility will be locked in a secure
room with a contingent of state regulators, consumer watchdogs and energy
consultants. They’ll be positioned in front of computer screens, waiting for
secret bids from at least a dozen power producers and energy traders who are
vying to supply wholesale electricity to Baltimore Gas & Electric Co. and its
1.2 million customers.
It’s the third – and likely the last – in a series of one-day reverse
energy auctions that few Marylanders know about, but none will be able to
ignore come July. That’s when regulatory price caps come off and results of
the free-market bidding will hit household budgets with the ferocity of a
hurricane, some say.
Electric bills could go up anywhere from 40 percent to 80 percent for BGE
customers as the effects of utility deregulation are felt for the first time
since legislation restructuring the industry was passed in 1999. Customers
will learn the amount of the increase in March when bidding results are
calculated and revealed. Utilities that serve other parts of Maryland – such
as Allegheny Power in Western Maryland and Potomac Electric Power in suburban
Washington – also are holding power auctions.
BGE officials are not brimming with optimism about the imminent bidding.
Rising demand for all forms of energy and hurricane-related supply disruptions
in the Gulf of Mexico last fall have sent prices for coal, natural gas and oil
soaring. All are burned to make electricity.
“Most of those [fuels] are up over 100 percent since 1999, and that’s
what’s really driving up the price of electricity throughout the United
States,” said Wayne Harbaugh, BGE’s manager of pricing and regulatory
services.
Such auctions culminate a long transition to the free market in states that
opted for electric utility deregulation. From the Northeast to the Midwest,
the bidding results have ignited a vigorous backlash from consumer groups,
sending lawmakers scrambling to find a solution to an energy crisis few
anticipated when they sold voters on the virtues of competition.
The architects of deregulation envisioned a free market where scores of
retail electricity providers would compete for residential customers, driving
down prices. But competition hasn’t arrived, critics say, because the rate
limits imposed by lawmakers six years ago set BGE’s prices so low that
challengers couldn’t compete. The same roadblocks are in place in other states
with deregulated markets.
In Illinois, consumer groups have responded by trying to block that state’s
first energy auction scheduled for September.
“It’s a gloomy picture for consumers,” said Pat Clark, a spokeswoman for
the Citizens Utility Board of Illinois.
Similar auctions held recently in New Jersey and Delaware raised
electricity costs in those states by 55 percent and 59 percent, respectively,
although those increases haven’t filtered through to customers’ bills yet. In
Delaware, some lawmakers have called for re-regulating the industry, while
others are trying to ease the transition to higher rates by phasing them in
over a period of years. Similar efforts are under way in Maryland.
“One should expect more volatility under deregulation, in the way of both
higher and lower prices,” said Paul Patterson, an energy analyst with Glenrock
Associates in New York. “You’re no longer guaranteed anything, and that’s what
it comes down to.”
Before deregulation, BGE owned its own power plants and delivered that
energy to customers over its transmission lines. BGE still delivers power, but
its generating plants belong to a different division of its corporate parent,
Constellation Energy Group, which sells the electricity it produces to the
highest bidder in the wholesale energy market. Constellation recently agreed
to be acquired by Florida-based FPL Group Inc., which was drawn to the
transaction in part by the Baltimore-based energy provider’s thriving
wholesale trading business.
With no generation of its own, BGE must go out and buy its power in the
same wholesale market that has helped Constellation Energy post record profits
in recent years. But unlike Constellation, BGE will be looking to do business
with the lowest bidder, not the highest.
Bidders in tomorrow’s reverse auction – where the lowest bid wins – are
kept secret, but it’s expected that Constellation will be among those vying to
supply at least a portion of the electric needs of its BGE subsidiary in the
year ahead. However, regulatory firewalls are designed to prevent the two
sides of Constellation’s business from sharing information or communicating
with each other. BGE officials say there’s only one way Constellation can beat
out its rivals.
“It really comes down to one number – the price that’s bid,” BGE’s Harbaugh
said.
Harbaugh will be among those monitoring the bidding. He will be joined by a
limited number of other BGE staffers, representatives of the Maryland Public
Service Commission, the Office of the People’s Counsel and a smattering of
energy consultants and auditors who will be there to make sure the process is
fair and delivers the best possible price to consumers.
Past participants describe the process as a little like watching paint dry.
That’s because participants tend to wait until just before 5 p.m. to submit
bids so that they can spend all day analyzing the latest price trends in
energy markets. Even the slightest movements in the price of natural gas or
coal, for example, can influence a company’s bid.
The bids can be delivered in one of three ways: by messenger, fax or
e-mail. The vast majority come in electronically.
“The [utilities and regulators] all sit in the same room with computers and
laptops, so they all see the numbers come in at the same time,” said Gary
Cohen, manager of regulatory affairs at Delmarva Power, which recently
completed an auction for its Delaware customers. The company serves customers
in Delaware, the Eastern Shore of Maryland and parts of Virginia.
The process in Maryland began months ago, when a call was put out for bids
– known as a request for proposals, or RFP. Potential bidders must be
certified if they want to participate. Those that qualified attended a pre-bid
conference, in which BGE officials described how much power they think they
will need to buy for various customer classes. BGE serves Baltimore City and
all or part of 10 counties in Central Maryland.
Auctions are held on three days spread weeks apart in order to reduce risks
associated with one-day market anomalies, such as a spike in prices resulting
from a cold-weather snap or, as happened last fall, a hurricane. A fourth
round of bidding will be held at the end of this month if suppliers fail to
bid on all of the load today.
Tomorrow’s auction will be for about one-third of the total load BGE is
trying to lock in. Results of the previous two rounds of bidding have not been
disclosed. Maryland residents won’t find out how much their bills will
increase until mid- to late-March, when the bidding results are calculated and
revealed.
Bidders include companies like Constellation, which own power plants and
trade electricity in competitive markets. But others might be pure energy
traders or investment banks, who hope to lock in long-term power supply
contracts at low prices and then resell them to BGE for a profit.
The good news for Maryland power customers is that natural gas prices have
come down considerably since the first round of bidding. That means today’s
bids should come in lower than in the previous two rounds.
“Prices are probably 25 to 30 percent lower than what they were when they
were set in December, and going forward we foresee them remaining in that
range,” said Mike Woytowich, project manager for Pace Global Energy Services,
an energy consulting firm in Fairfax, Va.
But even with natural gas prices trending down, BGE customers have little
choice but to pay higher prices. In the more than six years since deregulation
was passed by the General Assembly, no rival companies have come forward to
pose a credible challenge to BGE as a retail provider of power.
“We have a deregulated system, but it didn’t really lead to fostering
competition, which was the purpose of it to begin with,” said Suzanne Leta, an
advocate for the New Jersey Public Interest Research Group, a consumer group
that has monitored energy auctions in that state.
paul.adams@baltsun.com
