Tim Brennan
2008-04-03 07:00:00.0
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BALTIMORE -

In Maryland, electricity may have displaced slots as the most contentious issue in the state. This attention arises because many believe the market is working poorly thanks to price increases, projected supply shortages and concern over greenhouse gases. Talk of re-regulating the sector hangs in the air, but as we ponder our options, a few basics should be kept in mind.

Electricity really is different.

This market warrants attention because electricity uniquely combines three attributes. First, as we know, it matters. Second, it can’t be stored, so when we crank up air conditioners on hot August afternoons, generators must be there to produce. Third, failures in one part of the system can cause widespread blackouts, making reliability a public matter, not merely a customer choice.

Energy prices are going up everywhere.

One need only look at gas pumps to see a “rate increase” far above the 50 to 70 percent increase in electricity prices. Perhaps utility performance could be improved, but high rates shouldn’t be surprising. Competition aligns prices with costs — so if underlying energy costs go up, electricity rates will follow.

It’s not really deregulated.

The wires, high-voltage transmission and local distribution remain regulated. Where competition exists, in generation and retail supply, federal and state regulators retain oversight. Just this week, those 50 to 70 percent increases were deemed “just and reasonable” by the Maryland Public Service Commission.

Maryland only controls a small part.

Maryland’s electricity providers get supplies through the PJM wholesale market, which covers much of the mid-Atlantic. The federal government, not Maryland, exercises direct control over how that market works. Maryland’s authority covers only the retail end — sales to households and businesses.

Retail competition works for most of the market.

Residential service understandably gets the attention. Almost all of the customers have remained with traditional utilities. However, competition works in the 55 to 60 percent of electricity use supplied to commercial and industrial customers. The largest of these, as a group, get about 95 percent of their electricity from new suppliers. Overseeing residential rates may be appropriate, but full re-regulation may be counterproductive.

Adequate supply can be achieved with little reduction in overall use.

It is expensive to keep generators in place just to serve the most extreme demands. Utility planners say they design the system solely for late July and August. Cutting back use by 15 percent in less than 40 hours out of the year would keep the system stable. This reduction is only about .2 percent of total use — far less than an overall 15 percent target, as proposed by Gov. Martin O’Malley. Moreover, some of that .2 percent could be used, just at different times, e.g., running dishwashers and dryers at night on those hot summer days.

Electricity may be too cheap.

Normally, excessive use implies something is too cheap; believe it or not, that may be true with electricity. On those peak 30 to 40 hours a year, electricity is typically priced far below the cost of keeping plants in service just to meet that need. Smart meters, to allow billing when energy is used, are a good idea, particularly for commercial customers. For the rest of us, programs allowing utilities to shut off air conditioners at times of high demand are a step in the right direction. More broadly, energy generated using fossil fuels may not incorporate costs associated with climate change. Maryland’s decision to join other states in limiting carbon emissions may help.

Blaming us or utilities for excessive use may be misplaced.

If electricity should be cheaper, we would presumably use even more of it. To explain why we use too much despite high prices, some suggest that either we are ignorant in failing to take advantage of potential benefits from energy efficiency, or that utilities lead us to use more than we should. Providing information is a good thing, and subsidizing conservation may be justified if prices fail to reflect the true cost of electricity. But programs justified by our inability to make choices, or that utilities have led us down the primrose path, deserve to be a tough sell.

What to do about electricity remains a complex question. Having some sense of the basics may help improve our choices we have to make in the coming years.

Tim Brennan teaches economics and public policy at UMBC and is a senior fellow at Resources for the Future.