Electricity Debate Hinges on Debt

["Sandy Perle" <sandyfl@earthlink.net>]

Electricity Debate Hinges on Debt, Profit Deregulation Begs 
Fairness Questions   

Washington Post, Sunday, February 28, 1999; Page C01  

The country was staring down an energy crisis when Baltimore 
Gas and Electric Co. decided to build Maryland's first and only 
nuclear plant alongside the Chesapeake Bay in 1975. The Calvert 
Cliffs Nuclear Power Plant seemed like a good solution: a way to 
satisfy the region's thirst for electricity without depending on foreign 
oil and polluting the air.  

It cost about $800 million to build the twin reactors on the bay's 
shores in rural Lusby, about 45 miles from Washington. BGE 
studied its monopoly position in central Maryland and figured it 
could spread the nuclear plant costs across 40 years, which was 
the length of its federal operating license for Calvert Cliffs.  

But now, a little more than halfway through the life of the plant, 
state government is about to change the market rules. Maryland is 
considering whether to throw open the gates and invite electric 
companies from around the country to sell power in the state.  

BGE says it cannot vie for customers with out-of-state utilities 
while it is still paying off the huge costs of its nuclear plant. So the 
company is looking for financial help. It wants permission to freeze 
its rates until 2004 while also winning new tax breaks that would 
allow it to speed up depreciation of the plant's assets.  

But consumer advocates are saying that the state doesn't owe a 
private company any help and that BGE instead will profit in a 
competitive market in part because its other power generating 
plants remain valuable assets. In fact, BGE may actually owe its 
customers a rebate because it is making excessive profits now, 
consumer advocates argue.  

Figuring out what to do about Calvert Cliffs, and how to create a 
new electric market where all electric companies can compete on 
level ground, is at the heart of the deregulation debate raging in 
Annapolis and across the country.  

Currently, 18 states are in the middle of implementing deregulation 
while the others continue to struggle with questions of debt and 
profit. Residents in California and Massachusetts are trying to 
repeal deregulation and go back to regulated markets.  

Often at issue is a concept called "stranded costs," which refers to 
those past investments utilities have made in plants and equipment 
that leave them with debt they cannot easily write off.  

Some electric companies, like Potomac Electric Power Co., have 
decided to lower or eliminate their stranded costs by selling their 
generating plants and transforming themselves into companies that 
merely distribute electricity but don't produce it. In Pepco's case, 
its customers will share in the profits from its sale of generating 
plants.  

But BGE is in a special situation because a nuclear plant is 
difficult to sell. Only four of 110 nuclear plants in the country have 
been sold, and it is not exactly a seller's market -- the Pilgrim 
nuclear plant in Massachusetts is about to sell at less than one-
sixth of its assessed value. The selling price was so low that 
Massachusetts officials decided to let the plant's owner, Boston 
Edison, make up the loss through a "transition charge" all electric 
customers will pay over the next 10 years, said Michael Monahan, 
a Boston Edison spokesman.  

Maryland officials so far have not endorsed a similar charge. 
Instead, the staff of the Public Service Commission is 
recommending that Calvert Cliffs be exempted from deregulation for 
four or five years on the theory that a market for nuclear plants may 
develop and the agency then would have a more accurate way to 
evaluate stranded costs.  

So far, BGE executives estimate that they have paid off $304 
million of the original $800 million cost of the nuclear plant. The 
plant's book value is about $1.2 billion, which includes all the 
investments made to Calvert Cliffs since its creation, including last 
year's decision to replace the steam generators to extend the life of 
the facility. Subtracting $304 million from $1.2 billion leaves $911 
million in stranded costs, said Deanna Mummert, BGE's director of 
generation strategy.  

BGE executives say they have come up with a plan to pay off 
those remaining costs at no added expense to their customers, 
through a combination of creative accounting, new tax breaks and 
efficiencies that come with competition. The company has 
proposed freezing the rates customers pay at 1993 levels until 
2004.  

"The rates would stay flat," Mummert said. "We want to protect our 
customers. We can rearrange things internally so that earnings will 
be used to mitigate stranded costs. . . . There are ways that this 
can be a win for everybody and no one gets stuck with the cost."  

Critics, including Maryland's Office of the People's Counsel, which 
represents consumer interests, and staff members of the state 
Public Service Commission, say if BGE can "rearrange" things to 
recover almost $1 billion in four years, it is either inflating the 
estimate of those costs or is now earning excessive profits.  

The People's Counsel argues that BGE should be forced to give a 
rebate to its customers equal to about $100 a year from the current 
average annual household bill of $900 for four years.  

In addition, if BGE is allowed to recover its stranded costs, it could 
use that money to price its electricity below its actual costs to 
drive out competitors, argues Michael J. Travieso, the People's 
Counsel.  

Darcel Guy, a BGE spokeswoman, said the company is not 
making extra profits. "No, we are not over-earning. We are not 
overcharging our customers," she said, noting that the state's 
Public Service Commission approves the rates charged by the 
company.  

The commission has launched an investigation into BGE's rates 
while it tries to determine whether the company will have any 
stranded costs under deregulation. Both matters are scheduled to 
be decided by the commission in October, with the possibility of 
electric competition beginning in the state in July 2000.  

The commission also will decide whether stranded costs exist for 
the state's two other electric companies -- Delmarva and Allegheny 
Energy. But BGE's situation, because of its nuclear plant, is far 
and away the toughest to analyze.  

BGE provides electricity to more than 1.1 million customers in 
Baltimore and central Maryland. It also delivers natural gas to more 
than 565,000 customers in the state. In 1997, the company 
reported a net income of $282.8 million.  

Nearly all parties in the dispute over stranded costs agree on one 
thing: Deregulation of the electric business in Maryland may not 
necessarily mean lower electric bills for residents. The price of 
electricity for Maryland residents is already low, about 8.33 cents 
per kilowatt hour, less than the national average of 8.43 cents per 
kilowatt hour, according to 1997 figures compiled by the U.S. 
Department of Energy.  

In Maryland, the players who stand to profit most are the utilities, 
which can sell their electricity to new markets, and their large 
corporate customers -- the manufacturing plants, hospitals and 
others who use so much electricity that a slight decrease in their 
commercial rate would mean big savings.  

The relative low cost of electricity in this state should give BGE and 
other state utilities a long-term advantage that allows them to pay 
off any past debt and still make profits, state regulators say.  

"The utilities are asking for a subsidy up front," Travieso said. "It's 
not appropriate for them to collect that and keep that profit  
for a long time."

------------------------
Sandy Perle
E-Mail: sandyfl@earthlink.net
Personal Website: http://www.geocities.com/capecanaveral/1205

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