Commentary

BGE Ratepayers, Behold the Man

Marylanders gained some insight into their new governor last week when the state’s Public Service Commission, controlled by Gov. Martin O’Malley, approved a 50 percent rate increase for residential customers of Baltimore Gas and Electric Co. The approval comes less than a year after a bitter gubernatorial campaign between Mr. O’Malley and incumbent Robert L. Ehrlich Jr.

Recall that Mr. O’Malley lambasted Mr. Ehrlich’s PSC for approving a 72 percent BGE rate increase - an increase that the Maryland General Assembly later scaled back to 15 percent. Mr. O’Malley told voters that Mr. Ehrlich and his commission were in the pockets of BGE. If Mr. O’Malley were elected governor, he promised, his administration would stand up to greedy energy companies and protect consumers.

Doing the math reveals the conceit: When the O’Malley PSC’s 50 percent increase is layered on top of the General Assembly-approved 15 percent hike, the result is a 72.5 percent BGE rate increase. (Example: On a $100 electricity bill, the original 15 percent increase raises it to $115. Add 50 percent of $115 - $57.50 - and you get a total bill of $172.50.)

Meet the new boss, same as the old boss.

This may be Mr. O’Malley’s ecce homo (“behold the man”) moment. We behold him and see only an ambitious politician who makes promises and chastises opponents with no concern for fairness or honesty, and no interest in the underlying issues.

But the new governor can rescue himself from this image and deliver on his promise of responsible, professional leadership. He can create a much better ecce homo moment for himself if he takes two simple steps.

First, he should appoint PSC members with greater expertise in energy and energy markets. One O’Malley appointee, Susanne Brogan, served on the PSC from 1992 to 2001, when the commission designed and implemented the flawed BGE electricity auction regulations that contributed to the 2006 price spike. Mr. O’Malley’s appointee to chair the commission, Steven B. Larsen, is a respected consumer advocate, but he has no expertise in energy, and he confessed in interviews that he needs to learn the subject in order to perform his duties.

Maryland can find better public service commissioners than a person who lacks energy expertise and another person with a disastrous previous tenure. Two far better qualified people come to mind immediately: University System of Maryland economics professors Timothy Brennan and Peter Cramton, both of whom are nationally recognized experts in electricity markets.

Of course, there’s no guarantee that appointing energy experts would lead to lower electricity rates. But such knowledgeable individuals would have a far better understanding of the market and would better communicate what consumers need to know and consider about electricity.

And that leads into the second point: Mr. O’Malley should be honest with Marylanders about electricity markets. The conventional wisdom over the last two years is that electricity deregulation in Maryland has “failed.” A decade ago, conventional wisdom was that electricity regulation had “failed.” Neither claim is true.

In regulated markets, prices are higher than necessary most of the time. The higher prices pay for spare generation capacity for “peak” moments and guarantee profit for the operators of the generators. The benefit is that prices are lower some of the time - when supplies are tight or when fuel costs increase rapidly.

In deregulated markets, the opposite is true: Prices are lower most of the time, when supplies are plentiful and fuel cheap. But prices can spike when supplies are tight and demand is heavy.

In the early to mid-1990s, spot prices for electricity were lower than regulated prices, and many industrial and consumer groups lobbied for deregulation. They got their wish. Now that supplies are tighter and prices have increased for the coal, natural gas and uranium that fuel generators, many say deregulation is a mistake. But, in fact, we are just going through that phase of the price cycle when spot prices are higher than regulated prices.

Which is better - regulation or deregulation? People want the low prices of deregulated power when supply is ample and the low prices of regulated power when supply is tight. But we can’t have both.

Over a long period, the net price difference between regulated and deregulated systems is not significant. A recent statistical analysis by my Cato Institute colleague Peter Van Doren found that regulated and deregulated markets have experienced roughly the same change in rates since 1990, though regulated markets followed a smoother path to the current price. Regulated states have lower electricity prices overall, but that’s because regulated states generally had cheaper sources of power to begin with.

What does this mean to consumers? It means that neither regulation nor deregulation is a miracle cure for electricity problems - politicians cannot magically deliver lower electricity prices, at least not in the long run. Instead, both market designs bring benefits and problems.

Some consumers will fare better under a deregulated market, others under a regulated one. But we can’t switch back and forth between the two, because neither investors nor consumers would know how to plan for the future. You can’t guarantee returns on generation investment and then stop guaranteeing them when the guarantee is costly. And you can’t guarantee lower prices through regulation during peak periods but not pay for them when gluts exist.

Unfortunately, these messages - no magic solution exists, there is an upside and downside to both choices, people should use their own judgment - are anathema to politics. The messages are, however, what a good, responsible public servant would tell his constituents.

Governor O’Malley has the choice to be either a good politician or a good public servant. What he does in the wake of the PSC decision will define what Marylanders see when they behold the man.

Thomas A. Firey, a policy analyst for the Cato Institute, is co-author of the forthcoming booklet “The Maryland Electricity Market: A Primer.”