Ken Silverstein EnergyBiz Insider Editor-in-Chief

While Maryland’s rate case may be more pronounced than in most states, it is not an uncommon situation. The underlying market fundamentals that define prices are now more exacerbated than ever before and include extremely high wholesale natural gas prices as well as escalating costs tied to spot coal prices and electric generation in general. Meanwhile, the cost for such vital infrastructure such as steel and cement that go into power plant construction is also on the rise -- all things that get magnified in a market price environment such as the one that Maryland operates in.

In Montana, the state legislature there is considering laws to undo the deregulation schematic that the state had earlier enacted. Meantime, other states that have separated their transmission, distribution and generation businesses face rate hikes along the lines of those in Maryland: Pennsylvania and Connecticut, to name two. Proponents of deregulation -- enabling consumers to pay market rates for power -- say that free markets are not to blame; rather, the increases are directly tied to the underlying fuel and commodity sources. Utilities can only eat those higher costs for so long before they have to be passed on to consumers, which is something that is occurring in states that are not deregulated.

“Whether you are regulated or not regulated, you have likely seen rate increases,” says Robert Bellemare, CEO of UtiliPoint International. “But in the deregulated states the effects can get amplified because customers are paying the market price for electricity. In the old world, and for those who are vertically integrated, the price is set by cost-based regulation.”

In the 1990s, wholesale natural gas prices were cheap at roughly $2.50 per million BTUs. At this point, supporters of deregulation clamored for change, saying consumers would benefit from utilities having to streamline their operations and parcel out their generation assets to limit market dominance. But, today, natural gas rates have risen to as high as $15 per million BTUs and the effect is hitting consumers in their wallets.

Those who in live in states with market based rates generally pay the marginal cost of the most expensive generation that is dispatched, says Bellemare. But even states such as Florida that have not undergone restructuring, rates are on the rise. He says that many of the large utilities there as well as the municipals have increased rates by 15-35 percent since 2000.

Regaining control won’t be easy. One way is to maintain price caps. In other cases, legislators are considering reversing their laws and allowing utilities to own generation again as a way to hedge against rising prices.

Political Power

The rate case process is tedious. It typically takes a full year to resolve such cases. And, oftentimes, the data that is used to educate regulators is stale by the time decisions are being made. Needless to say, it’s the utility companies that have the upper hand -- the deep pockets -- in these discussions. More often than not, the utilities get much of what they seek, although the regulators are able to drag concessions out of them that accrue to the benefit of consumers.

“The bigger they are the more political power they have,” says Sean Boland, partner with Howrey law firm in Washington D.C. “Enron is a perfect example: It had huge political power and it flexed it. Deregulation will be painful for a while, but it may all work. Restructuring is too far along to reverse it.”

The Maryland case is drawing the headlines. Constellation would raise consumers’ bills by 13 percent initially. Then, by January 2007, it would add another 15 percent and by July, it would tack on 15 percent more. The price caps would be removed shortly thereafter. Legislators counter that Constellation expects to realize $200 million in savings from its proposed merger with FPL Group and that the preponderance of the money should be used to offset price hikes.

Nevada Power, meantime, is now asking state regulators for a 23 percent rate increase. The utility says that the roughly $30 average annual increase in bills would be phased in. Average summertime bills might be as high $212 a month, say regulators there.

States such as Arizona are performing audits on fuel procurement. Others such as Colorado are looking increasingly to coal generation that is much more cost effective at present. In a vertically integrated world such as the one Colorado operates, the public utility commission can order a utility to change the way it is buying fuel or to even change fuel sources. Indeed, generation is typically 50-60 percent of a customer’s bill.

Underlying Changes

San Francisco-based Pacific Gas & Electric is working with The Utility Reform Network to ease the affect that high natural gas prices are having. Both want to motivate consumers to save energy. As such, PG&E will give a 20 percent rebate to households that use 10 percent less gas for three straight months when compared to their usage one year prior. Customers that don’t save will pay a little more to cover those rebates.

“The underlying changes have been abrupt and commodity markets have been volatile,” says Billy Jack Gregg, director of the consumer advocate of the Public Service Commission of West Virginia. “What we try to do is adopt procedures to smooth out that volatility for customers but make sure that the underlying price signals get through so that customers can react by reducing demand.”

The cumulative effect of the demand reduction -- coupled with warmer weather -- is the fall of natural gas prices that have occurred in national markets. They have dropped from $15 per million BTUs in December to $7 for the same unit today. At the same time, Gregg says that both gas and electric utilities have financial options available to them, namely the use of hedging options such as long-term coal contracts.

Rate case management is an art and a science. Deciding cases is not too different from judging other legal issues. It's an adversarial process in which utilities and interested parties line up and make their arguments in a public forum. Regulators act as judge and jury. Typically, settlements are reached and utility commissioners give their stamp of approval. While the process is all done in the open, consumers often lack the interests to get involved. The threat of increasingly high prices, however, has changed all that.

For far more extensive news on the energy/power visit:  http://www.energycentral.com .

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