Mishandling Electricity Regulation

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Governor Ehrlich of Maryland has scheduled an unusual public hearing for tomorrow to consider the question of whether he should veto new legislation that would limit residential rate increases for the largest utility in the state, Baltimore Gas & Electric, to 15% this year.

Ordinarily, electricity rate increases are politically obscure, but in Maryland, price regulation suddenly is the dominant issue in this year’s gubernatorial election, overwhelming such traditional issues as education, crime, and taxes.To understand why, consider the year 1993.

Crude oil prices that year were between $14 and $20 a barrel. Today, they hover around $70 a barrel, and other energy prices have increased in tandem. BGE residential electricity rates, however,remain the same as they were in 1993.

Residents of Baltimore currently enjoy lower electricity rates than the vast majority of residents on the East Coast.That’s true not because of a wellfunctioning electricity market in Maryland, but precisely because the market does not work well. In 1999, state legislators capped rates through 2006 and permitted other suppliers to enter Maryland to compete with BGE and other utilities. The politicians called the price caps part of “deregulation.” California similarly tried an experiment with electricity markets that only a cynic could label “deregulation.” Many of the electric utilities in California were pushed into or near the brink of bankruptcy.

Businesses naturally would not enter markets where rates are regulated at artificially low levels. Maryland consumers are left with electricity rates set not by market forces but by government officials.

Now that price caps are about to expire, BGE proposed and state regulators approved a 72% rate increase to bring electricity rates in line with surrounding utilities, but still much lower than many utilities in the Northeast, including those in the New York metropolitan area. This being an election year in Maryland, though, current state officials fear that many state residents will blame them for a rate increase a few months before the election, even a rate increase that is many years overdue.

The lessons of past mistakes should be learned, but in Maryland legislators continue to attempt to defy the laws of economics. Having for years distorted electricity markets with rate regulation, the legislature last Thursday passed a law that would permit electricity rates to rise by only 15% before this fall’s election. In the bill, the state utility regulators would be blamed for the mistakes of the past legislatures and be summarily fired.The governor would choose a new set of regulators from a hand-picked list drawn up by (surprise) the legislature. Those new regulators would be required to find a way to deal with the 72% rate increase, and any new rate increase that might needed over the next year. For good measure, the legislation would largely prohibit the ousted state regulators from appealing.

Mr. Ehrlich, who is up for re-election, has only a few days to decide whether to sign the bill that will continue rate regulation. Alternatively, he could veto the bill and face an almost certain override from the legislature. Electricity rates and government mishandling of them now appear to be the central issue in the Maryland gubernatorial campaign, with both sides pointing fingers at the other.

BGE is in a difficult predicament. For several years, it has been counting on a major rate increase in 2006. Other electric utilities in Maryland, such as Pepco, have rate increases in the range of 40% that are largely left unchallenged. BGE almost alone is left to incur the wrath of legislators.

Much more is at stake than the fate of BGE and the residential electricity rates in Baltimore. Other businesses in Maryland and around the world look at the comic antics of the state legislature with a mixture of amusement and fear. Legislatures that engage in ruinous price regulation for years – and then extend it at the first opportunity – are the types of government a business wishes on its competitors.

Mr. Ehrlich should veto the bill continuing price regulation. This November, let the people of Maryland decide who was right: legislators who were convinced that price regulation is more important than new business investment for Maryland, or a governor who believed they were wrong.

A former FCC commissioner, Mr. Furchtgott-Roth is president of Furchtgott-Roth Economic Enterprises. He can be reached at hfr@furchtgott-roth.com.

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