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Turning Up the Heat on Energy Prices

Electric bills to rise 39 percent this summer. Industry deregulation carried promises of competition that has never materialized.

Potomac residents are already paying more at the pump — $2.85 per gallon in Potomac Village on March 20. This winter, they are contending with a spike in home heating costs, which are up 30-40 percent, according to the Alliance to Save Energy.

So perhaps they won’t be fazed when their electricity bills rise 39 percent in June, when air conditioners are on full blast.

The average bill for residential Pepco customers in Maryland will rise from $101 today to $140 in July after the energy provider hikes rates June 1.

“Of course there’s a difference between people who live in apartments to people in Potomac mansions,” said Robert Dobkin, a Pepco spokesman. “You buy a house that large you can expect to spend a lot more to heat and cool it.”

In an informal survey, Potomac homeowners reported monthly bills averaging $350, which would rise to $486.

“Lately people are inquiring as to how many zones the systems have,” said Andrea Alderdice, a real estate agent for Long and Foster. “People are rethinking their purchases in terms of size. … Mine runs around $320 in the summertime and it’s not that big a house.”

The average electric bill for businesses served by Pepco will rise 50 percent.

“That’s going to be significant among five restaurants,” said Potomac Pizza owner Adam Goldberg, whose two restaurants in Potomac Village together currently average close to $4,000 per month for electricity.

But, Goldberg said, “I don’t think there’s anything we can do.”

THE INCREASES — approved last week by the Maryland Public Service Commission, which oversees utilities — reflect a mixture of market forces and policy decisions six years after energy deregulation in Maryland.

The state approved deregulation in 2000 amid rhetoric of consumer choice and the pricing boons of competition. Pepco rates were lowered 7 percent and capped until 2004 in order to allow a competitive market to open up.

That never happened. Electricity deregulation "was a bad idea and it was executed in the worst possible way," said Sen. Brian Frosh (D-16), who opposed the 1999 legislation. "We had a system that worked. It provided reliable power at reasonable cost to everyone in Maryland and it worked great. And now we’ve got a less reliable system and it's going to cost a ton."

“If anything, the rates were below-market,” Dobkin said. “When the caps came off, there was some rate increase, I think around 15 or 18 percent at the time for customers who didn’t choose a competitive supplier.

“It’s true there was not a lot of competition for residential customers. With our below-market rates, few if any suppliers could compete with us.”

In other words, this year’s price increases are simply reality catching up with consumers, Dobkin said. In the past five years, coal prices have risen 150 percent and natural gas prices have increased more than 400 percent.

Deregulation did benefit the largest electricity consumers—those using several megawatts per year—who could negotiate better prices based on their large consumption. One remedy for the current rate increases is to allow counties do the same thing by aggregating participating citizens' power consumption.

That practice was specifically outlawed in deregulation and repeal efforts have failed every year since then. But the aggregation effort has gotten newfound attention this year due to the rate increases. Montgomery County Executive Doug Duncan (D) was among those who testified in support of aggregation at a Senate Finance Committee hearing March 21.

Deregulation was "tilted towards the industry and against the consumer," said Frosh, who has publicly criticized Gov. Robert Ehrlich Jr. (R) and the Public Service Commission in recent weeks. He highlighted "stranded cost" provisions that compensated utility providers for investments—mainly power plant construction—that they were compelled to make under regulation.

The utility companies were not forced to build, he said—in one case, Baltimore Gas and Electric actually won the right in court over the state's objections—and the plants were actually more valuable after deregulation.

"We paid them hundreds of millions of dollars when we deregulated," Frosh said. "It was a giveaway."

The utilities then turned around and sold those power plants for further profits, said Roger Berliner, a County Council candidate from Potomac who has spent much of his career as an attorney and policy analyst dealing with energy issues.

Pepco and other energy companies now buy electricity from larger energy providers in a Public Service Commission-supervised auction. Pepco passes on its costs plus a distribution charge.

“It doesn’t generate its own power, so it is out there buying power,” Berliner said. “So it’s not as if we have the regulatory means, if we wanted to use them, to say ‘This is too much.’”

Each unit of electricity delivered to the homes comes from a blend of fuel sources — perhaps one-third coal, one-third natural gas and one-third nuclear. (Dobkin could not provide a breakdown for Pepco.)

Berliner observed that prices for all fuel sources are hitched to the most expensive source — currently natural gas. Coal producers sell at nearly the same per-unit price as natural gas producers and simply reap a larger profit.

“There is no differentiation of those units in a deregulated, market-based world,” Berliner said. “In a regulated, cost-of-service world, there’s a big difference.”

SOARING ELECTRIC prices tied to relatively clean-burning natural gas could be a particular thorn in the side of Montgomery County residents living near the coal-burning Mirant power plant in Dickerson, which state and county legislators have cited as a source of environmental and public health problems.

“In many ways the Dickerson plant represents the worst of all worlds as a poster child for the failings of deregulation,” Berliner said. “It’s dirty, using cheap coal, and gets to sell at natural gas prices. It’s a great deal for everybody but the citizens.”

Dobkin said that Pepco passed the profits from selling its plants on to customers in the form of credits against their bills. He advised consumers to consider energy-saving measures, which are listed in a brochure on Pepco’s Web site.

“There are common-sense things people can do,” he said. “In the summer, don’t turn it up quite as high; keep the shades drawn.”