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Showdown looms over Md. electricity re-regulation

This story was updated at 2:15 p.m. EDT.

Maryland Gov. Martin O'Malley (D) and the state's energy providers are in the final round of a battle over legislation that would reverse a decade of electricity deregulation and put the state back into the power business.

Maryland's electricity prices, among the highest in the nation, have angered the public and politicians, and the recession has left about 200,000 of the state's residential customers behind on their electric bills.

Officials are fearful that Maryland -- which must import about 30 percent of its power -- may run short by 2012 if new generation is not added or if several major transmission projects are delayed. Of Maryland's total summertime power generation capacity, 7 percent was built within the past 10 years.

O'Malley is promoting a bill that instructs the Public Service Commission to assess Maryland's electricity requirement and authorizes it to order utilities to build new generating plants if necessary to meet the state's needs. Energy providers would be paid cost-based rates approved by the Public Service Commission.

"The only way we're going to get new plants built is to go back to the regulated monopoly model," said state Sen. James Rosapepe, a Democrat who supports the O'Malley bill. "We'll guarantee you a long-term market and a modest return on equity."

"This is the first step toward a long-term fix," said Malcolm Woolf, director of the Maryland Energy Administration. "I don't see the merchant generators actually building. We have lots of proposals, lots of permits, but we're not seeing the plants being built."

Maryland's Senate has approved the proposal, but the House has yet to vote, with adjournment scheduled for Monday.

Exelon Generation, a major electricity supplier to the mid-Atlantic region, warned that the proposal would inflict heavy, wasteful costs on consumers.

"Under this proposal, you will see power plant cost overruns, gross inefficiencies and consumers who won't have a choice in the matter," Exelon Vice President Jan Freeman said in a statement. "Giving government a mandate for new construction without considering lower cost options is a recipe for financial disaster."

The principal reasons for Maryland's power supply predicament are disputed by both sides in the debate.

Michael Powell, a lobbyist representing large power customers, said generation projects are undermined by the state's stringent environmental and plant siting requirements, which steer power companies toward Pennsylvania or West Virginia -- two main sources of Maryland's power imports.

There is no reason to rush a bill through, Powell added. The recession has sliced into the state's power usage: The 2008 peak summer demand was 7.5 percent below the 2007 peak, the Public Service Commission reported. "We've bought two or three years more time, at a minimum," Powell said. "The question is, why the hurry to do it this year? The only time pressure is, we have an election" in 2010.

To which Maryland people's counsel Paula Carmody, the state-appointed consumer advocate, replied: "That's kind of insulting. We keep hearing, 'Let's wait. Let's wait.' I think a decision needs to be made. Do we continue waiting or try to regain control of our energy needs?"

It is not a foregone conclusion that the Public Service Commission would wind up ordering new plants to be built. Getting additional energy conservation and demand reduction will help. Long-term contracts may make up power deficits, Carmody said. But the commission needs a clear mandate to order construction if it is needed, she added.

The bottom line, as the O'Malley administration sees it: Current power markets managed by the PJM Interconnection are not producing the additional electric power that Maryland requires.

Long fight over 'reliability pricing'

Behind the Maryland debate is a long-running dispute about PJM's complex approach to securing the additional generation capacity that is held in reserve to meet peak loads when power demands are highest.

PJM, which runs electricity markets and oversees the transmission network in 13 states and the District of Columbia, created its "Reliability Pricing Model," or RPM, to solicit offers of new peak power generation from energy companies.

PJM auctions opportunities to supply the power three years in advance of when it would be needed. It sets payments for power based on a pricing formula that is intended to incentivize competitive offers while preventing companies from gaming the process. The first auction was in 2007.

Maryland officials and other parties attacked the RPM plan in a case before the Federal Energy Regulatory Commission heard last last year and decided in favor of PJM's approach.

Economist James Wilson argued against the PJM plan on behalf of the American Public Power Association, asserting that the first four auctions produced high power prices by few new offers of generation.

Wilson said that because a relatively small number of major energy companies bid in the RPM auctions, they have an incentive to withhold some of their potential power supplies, constraining supply and producing higher prices for their offers that do get chosen.

Eighty percent of the generating capacity in PJM is "owned by entities large enough (together with affiliates) to potentially profit from withholding capacity" from the auctions, he said.

Wilson's assertions are echoed by Maryland officials, including Woolf and Carmody.

The RPM payments, Woolf said, provide a "windfall" to companies that choose not to add new capacity. Said Carmody, "The RPM [process] provides a perverse incentive -- if you can collect money for not doing something, it may impact your decision."

Wilson's analysis was stiffly disputed by Joseph Bowring, PJM's market monitor, who is charged with overseeing whether PJM's markets are competitive and fairly run.

Bowring said last year that his unit checked "every megawatt" of generating capacity in the PJM system and determined that there were valid reasons when power supplies were not bid in the auctions.

"There was no physical withholding in any RPM auction to date," Bowring said. "In no case does the evidence support Mr. Wilson's claim that market power was exercised in the RPM auctions."

PJM submitted a report to FERC by the Brattle Group consultancy that defends the RPM results, particularly those of the most recent auction, in May 2008.

The study found that nearly 4,300 megawatts of new generation have been offered in the auctions; about 600 megawatts were added from mothballed generators that were reactivated, and about 4,700 megawatts were gained from units that were scheduled to be taken out of service but were kept online. The result is that reserve margins in PJM are now slightly above target, he said, pronouncing the program a success.

Maryland's Public Service Commission counters that resources in the multistate PJM system will not help Maryland if power lines are too congested to transmit the energy to the state.

Some analysts argue that the problem with RPM is that its price equation is the result of a "political" process itself, in which generators claim that PJM is too stingy, and power buyers and consumer advocates say the PJM price curve is too high, leaving no one happy.

Maryland legislators will soon decide whether another politically derived process supplants RPM in their state.

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