Legislature in the Dark about Electricity
by Ray Gifford
Special to The Baltimore Sun
July 7, 2006
Maryland will suffer for some time into the future because of the legislature’s poor, populist choices about electricity. As expected, last week the Maryland legislature’s overrode of Governor Ehrlich's veto of a bill that would have limited Baltimore Gas & Electric's rate increases and eliminated all the current members of the PSC. The bill is a travesty for Maryland consumers and good regulation.
By repealing the rate increases, the legislature effectively denies BG&E the ability to pay the competitive price for electricity. While this is being hailed as a populist victory over corporate greed, no one has made an effective case that the PSC's determination of the need for an increase was wrong, or overestimated the BG&E’s costs. Instead, the legislature chooses to defy simple regulatory math—a electric utility must be able to charge what electricity costs, or it will provide too little, or slowly go out of business.
The PSC’s 72% rate increase – whether phased-in or digested all at once -- is certainly large, yet it tracks increases for other energy resources. With natural gas prices up over 300% the past few years and the market price for electricity being far above that currently charged by BG&E, it is no surprise that rates would rise, even substantially. Now, the legislature did not let these basic economic facts get in the way of a good political skewering of the PSC and Constellation Energy, BG&E's parent. Because of the legislature’s decision, Maryland ratepayers will get to enjoy lower bond ratings for its utility, higher debt costs, less capital expenditures, diminished reliability, and all other byproducts of a good populist rebellion. A rate-starved utility is a less reliable, less responsive, higher cost utility in the long run.
Just as disturbing as the legislature's unilateral suspension of the price system is its dismissal of the Maryland Public Service Commission. The wholesale sacking of the commission by the political branch bodes ill for the regulatory climate in Maryland. To begin with, pending regulatory matters will be put on hold while a new commission is found and seated. Cases may have to be retried, new commissioners brought up to speed en masse, and even already decided cases will have uncertain authority.
Longer term, the finality and reliability of commission decisions is now suspect. The precedent for a legislative "veto" of commission decisions will always loom, creating negative consequences for the decisions made by the commission in the first place. Finally, the independence of the commission in Maryland is fatally compromised. Instead of a commission devoted to the rule of law, Maryland will have one attuned the political winds of the legislature. A commission that is always looking over its shoulder at how the legislature might react is not independent at all, and will trim its decisions to suit the prevailing political winds.
The net effect of such an uncertain and zany regulatory climate is that investment will flee Maryland, or at least demand a higher return because of the regulatory risk. This means higher rates, worse service, and probably both.
Of course, a committed populist will celebrate all of these things, arguing that these decisions should be made according to political criteria by the elected representatives of "the people." Fair enough. But, as with the rate issue that gave rise to this legislative tantrum, the effect on Maryland consumers will be negative. A state whose political class yanks around its utilities in this way will drive away capital and investment, lower bond ratings and increase cost of capital. How this benefits "the people" defies explanation.
Fortunately for current legislators, but unfortunately for future Marylanders, there will be no immediate fall-out from this short-sighted choice. Rate increases, reliability concerns and decreased utility investment will only play out over a long span of years. Also, these increases will come to Marylanders through the arcane and impenetrable formulas of regulatory ratesetting. There will be no political accountability for this terrible decision, only wreckage down the road for a future political class.
Ray Gifford is President of The Progress & Freedom Foundation, a Washington, D.C.-based think tank. He is former Chairman of the Colorado Public Utilities Commission.
Ray Gifford is a Senior Fellow and President of The Progress & Freedom Foundation.
This article was published July 7, 2006 in The Baltimore Sun.